Recent Acquisition Amounts To Another Great Deal For Linn Energy LLC

Oil and gas producer Linn Ener­gy LLC (NSDQ: LINE) announced the acquisition of oil and gas produc­ing properties in the Jonah Field of Wyoming from BP (NYSE: BP) for $1 billion.

This is yet another phenomenal deal for Linn that’s immediately accretive to distributable cash flow and will result in significant growth in distribu­tions later this year. About three-quar­ters of the output from the Jonah field properties is natural gas with the re­mainder primarily consisting of natural gas liquids (NGLs).

At first blush, that heavy gas focus might appear to be a problem since natural gas continues to trade well under $3 per million British thermal units. However, as I said in Investors Not Appreciating Improvement In Eagle Rock Energy Partners LP's Underlying Business, Linn isn’t betting on a rise in near-term gas prices. Instead, the company was able to buy these properties at dirt-cheap prices and hedge 100 percent of its expect­ed oil and natural gas output over the next six years. That means that Linn has effectively locked in a fixed profit margin on the output from this acqui­sition over a period of six years, with no exposure to near-term commodity price volatility.

Linn also announced that it has filed with the US Securities and Exchange Commission to list a new company called LinnCo later this year. LinnCo has elected to be taxed as a corpo­ration rather than a partnership like Linn Energy (NSDQ: LINE).

LinnCo won’t be an operating company or own any assets, but all proceeds from the offering of this stock will be used to buy units of Linn Energy, which means the deal won’t be dilutive to current unithold­ers. Please note that this deal is not a spin-off and current Linn sharehold­ers will not receive units of LinnCo when it comes public.

Because LinnCo is taxed as a cor­poration, it will pay ordinary quali­fied dividends and send out a standard form 1099 to investors at tax time rather than the K-1 partnership form that Linn Energy sends out to share­holders.

That feature will make LinnCo at­tractive to certain classes of investors. For example, some foreign and institutional investors face tax complica­tions from receiving distributions rath­er than qualified dividends; LinnCo will allow these investors to buy Linn while avoiding K-1 tax filings.

Individual investors who purchase partnerships such as Linn inside an Individual Retirement Account or 401(k) can face additional complica­tions at tax time because some of the distributions paid constitute unrelated business taxable income. LinnCo will be subject to US corporate tax but could be an attractive alternative for those wishing to buy Linn in tax-ad­vantaged accounts.

The deal will help Linn Energy unitholders because it offers yet an­other avenue for Linn to raise capital to take advantage of acquisition op­portunities.

LinnCo represents an innovative transaction that’s likely to be copied by other master limited partnerships (MLPs) and limited liability compa­nies (LLCs) as a means of raising capi­tal from investors unwilling or un­able to invest in partnerships.