linn energy takes a new approach to combat its greatest foe
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LINN Energy’s latest portfolio reshuffle shows that the company is taking a new approach in its battle against its greatest foe. It’s a foe that both Devon Energy and Apache are better prepared to handle than LINN Energy.TRANSCRIPT
LINN Energy Takes a New Approach to Combat its Greatest Foe
Photo credit: Apache
There’s one foe that continues to plague LINN
Energy…
…and I’m not referring to short-sellers or the
financial media.
Instead, LINN Energy’s greatest foe is the natural decline rate of its oil and
gas wells.
The company is now realizing that its current portfolio isn’t the best to
combat this foe.
So, it’s now taking a new approach to get its decline
rate under control.
Instead of drilling horizontal wells to organically grow production and offset the declining production of its legacy wells, the company is
redoubling its efforts to acquire really low decline oil and gas assets.
Photo credit: LINN Energy
Its first step was to exit its position in the Permian Basin that’s prospective for high decline horizontal wells and
replace it with low decline assets.
Photo credit: LINN Energy
It’s easy to see why LINN wants to exit the horizontal Permian Basin, just take a look at the decline rates Devon Energy
experiences when it drills horizontal wells in the Permian Basin.
Source: Devon Energy:
In trading away 25,000 net acres in a deal with ExxonMobil, LINN Energy was able to avoid drilling
these high decline wells to offset its overall production decline. Instead, the company picked
up wells and future drilling locations in the Hugoton Basin of Kansas that have a very shallow
base decline rate of just 6%.
The company hopes to sell or trade the rest of the 30,000 net acres it has available in the Permian
Basin. Ideally, these acres would also net the company additional low declining oil and gas
assets.
The second move LINN Energy made was to announce plans to divest its Granite Wash and Cleveland
play assets.
Photo credit: LINN Energy
Here again we can get a general idea of the decline rates of these wells by looking at the production type curve of
Apache’s wells in the Granite Wash and Cleveland plays.
Source: Apache:
LINN Energy plans to sell much of its 147,000 net acre position in these two plays to pay for its recent
$2.3 billion deal with Devon Energy.
In doing so LINN Energy is trading assets that have a steep decline rate for Devon Energy’s much lower
decline natural gas properties.
As noted in the chart below the assets LINN Energy is acquiring from Devon Energy have a much lower decline rate
of about 14%.
Source: LINN Energy:
In these two deals we see that LINN Energy is
willing to accept a base decline rate as high as 14%. While that rate
might sound high, this is well below the rate it’s divesting and is in line
with the company’s previous acquisitions.
Here is a list of the decline rates of LINN Energy’s last few years’ worth of deals:
Asset Decline rate Production DateHugoton Basin 7% 63% natural gas, 37% NGLs February-12East Texas < 10% 97% natural gas March-12Salt Creek JV < 7% 100% oil April-12Jonah Field ~14% 73% natural gas, 27% NGLs June-12Berry Petroleum ~ 15% 75% oil and NGLs February-13East Goldsmith Assets Not Given 70% oil September-13ExxonMobil Hugoton assets ~6% 80% natural gas 20% NGLs May-14Devon Energy Assets ~ 14% 80% natural gas June-14
Investor takeaway
For LINN Energy a low teens decline rate is much easier to overcome than the 60%+ first
year decline rate of a horizontal well. That’s why the company is
reversing course in its battle against its overall decline rate
by trading away horizontal assets to load up on low declining vertical wells.
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