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Linn Buying More Shares, Still Planning to Separate by Mid-2018

Linn Energy Inc. has repurchased about 5.9 million shares for $206 million as part of its ongoing $400 million share buyback program and expects to have $405 million in cash on hand at the end of the first quarter, as it continues to consider separating into three standalone companies in 2018.

One year after emerging from bankruptcy, and having executed its plan to sell nearly $2 billion in noncore assets last year, the Houston-based company said it had successfully completed its tender offer to purchase up to 6.77 million shares for $325 million.

During most of the quarterly conference call Tuesday, management discussed the go-forward plans announced last December toseparate into three standalone companies by mid-2018.

CFO David Rottino said Linn was still "working through the mechanics" of splitting the company into three entities.

"Simplistically, the way I think about it is right now, if you own one share of [Linn], you would be issued a share of three different companies," Rottino said. "The market would decide the valuations and the market cap for each one of those...We think the value of the three is potentially greater than just one company that houses three different types of assets."

The plan calls for Linn to become a holding company for an existing half-stake in Roan Resources LLC, an exploration and production (E&P) company that would focus on developing Oklahoma's myriad basins within the Anadarko Basin -- specifically, the Merge prospect and the SCOOP (aka the South Central Oklahoma Oil Province) and STACK (aka the Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties).

The plan also calls for midstream subsidiary, Blue Mountain Midstream LLC, to become a separate company focused on developing Midcontinent infrastructure. Chisholm Trail, a natural gas gathering, compression and processing system in the Merge, would be Blue Mountain's "primary asset" at separation. Blue Mountain secured about 7,200 acres in the Merge last December, bringing its total dedicated acreage to more than 80,000 net acres.

A third entity, now dubbed "NewCo,” would, as proposed, be a publicly traded company focused on Linn's remaining E&P and midstream assets. Specifically, NewCo would have assets in the Hugoton Basin in Kansas; the Arkoma Basin; Michigan and Illinois; East Texas and North Louisiana; and the northwestern part of the STACK play.

Linn produced 505 MMcfe/d in 4Q2017, down 32% from the year-ago quarter (748 MMcfe/d). Production in 4Q2017 included 321 MMcf/d of natural gas, 13,000 b/d of oil and 17,600 b/d of natural gas liquids. Full-year production was 637 MMcfe/d in 2017, down 20% from 2016 (796 MMcfe/d).

Roan completed 19 wells and turned them online in 4Q2017, and it had five drilled but uncompleted wells with about eight miles of uncompleted lateral length at the end of the quarter. The subsidiary was running six drilling rigs and two completion crews in the Merge at the end of 4Q2017.

Two horizontal wells were completed last year in East Texas targeting the Lower Red and Upper Red zones of the Cotton Valley Sands Terryville Complex, Two more wells were completed in North Louisiana within the Bossier and Cotton Valley Lime formations. This year Linn plans to focus on participating in nonoperated activity on its North Louisiana acreage, and it may pursue operated drilling activity, depending on commodity prices. In East Texas, Linn plans to drill additional wells to further delineate its operated acreage.

Linn approved a capital budget of $134 million for 2018, which includes $34 million for oil and gas operations, $98 million for plants and pipelines, and $2 million for administrative costs. The company plans to focus on completing a 250 MMcf/d Chisholm Trail cryogenic facility in the Merge, as well as technical development of unproved inventory in East Texas and nonoperated activity in the northwest STACK and North Louisiana.

According to a supplemental earnings presentation, Linn plans to allocate $73 million to Blue Mountain in the first half of 2018, and $23 million in the second half of this year.

Excluding Linn's 50% stake in Roan, and assuming all previously announced asset sales close in 1Q2018, net production guidance is 375-415 MMcfe/d for 1Q2018, and 296-328 MMcfe/d for full-year 2018.

Linn reported net income of $86 million in 4Q2017, compared with a net loss of $834 million in the year-ago quarter. For the full year, Linn reported net income of $2.83 billion, compared with a net loss of $2.17 billion in 2016. Following the completion of bankruptcy, Linn earned $4.94/share for the 10 months that ended on Dec. 31.

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