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Granite Wash to Be Linn's Primary Focus in 2012

With new liquids-rich properties in pocket, Linn Energy LLC said Monday it plans to spend $880 million in capital expenditures (capex) in 2012, with more than half allocated to the unconventional Granite Wash formation in Texas.

The Houston-based independent announced its capex program on Monday after completing purchase of a package of Midcontinent properties from Plains Exploration & Production Co. (PXP). PXP in November agreed to sell the properties to Linn for about $600 million (see Shale Daily, Nov. 8). The assets produced around 84 MMcfe in 3Q2011.

"Linn delivered exceptional results again in 2011," said CEO Mark E. Ellis. "The company grew organic production by 30% and closed $1.6 billion in acquisitions, while also raising our quarterly cash distribution by 5%. We expect our 2012 capital program, coupled with a full year of production from assets acquired in 2011, to deliver a 40% production increase. Half of that growth is expected to come from organic projects."

Next year Linn plans to focus "primarily on low-risk, high-rate-of-return liquids drilling" and expects to drill or participate in close to 340 wells in 2012. Around 53% of the spending is allocated to the Granite Wash in the Texas Panhandle, where Linn plans to drill or participate in 75 horizontal wells. To date Linn has drilled 36 operated horizontal wells in the Granite Wash. At the beginning of this year the company had identified 200 horizontal drilling locations in the play. Prior to the PXP acquisition Linn held around 12,000 net acres in the Granite Wash. Including the acquisition, Linn now has 32,000 net acres in the play.

"The knowledge gained through its horizontal drilling program enabled the company to add 200 additional horizontal drilling locations to its inventory in 2011, and the recent acquisition added another 200 locations," Linn stated. It plans to begin the 2012 horizontal drilling program "with a total of 600 drilling locations that should provide a 10-year drilling inventory in the Texas portion of the play alone." Fifty-nine operated horizontal wells are planned there in the coming year, which should generate "rates of return in excess of 50%." The company also plans to participate in 16 nonoperated horizontal wells in the Granite Wash in 2012.

Another 23% of Linn's 2012 capex program is set aside for the Permian Basin, where the company plans to drill or participate in almost 100 wells. Six percent of next year's budget is dedicated to the Bakken Shale and another 6% is to go to the Cleveland play. The balance of the capital program is to be directed at workover, recompletion, optimization and facilities projects.

Linn said it also has "fully hedged production volumes associated with its Granite Wash acquisition." Based on current production estimates, expected natural gas production is 100% hedged at prices above $5.45/Mcf through 2015. Expected oil production is 100% hedged at prices above $97/bbl through 2013 and about 80% at prices above $95/bbl in 2014 and 2015.

According to Motley Fool's Aimee Duffy, Linn last summer drilled its second well in the Granite Wash and "received outstanding results: 27 MMcf of natural gas, 3,190 bbl of condensate and 3,530 bbl of natural gas liquid -- in 24 hours. It is no surprise that the company continues to focus heavily on production in the region..."

The Granite Wash, she said in a note, "is yet another energy reserve that is booming because of horizontal drilling. As U.S. energy policy continues to evolve and natural gas continues to become more popular, companies...should produce great returns. Consider also the tangential plays tied to increasing natural gas production, like pipelines [and] oilfield service companies..."

The Granite Wash extends from the Texas Panhandle across to western Oklahoma and has mainly been exploited for natural gas and natural gas liquids. Chesapeake Energy Corp. is the largest acreage holder with an estimated 200,000 acres. Its special investment vehicle for the play, Chesapeake Granite Wash Trust, receives 90% of the royalties from 69 existing wells and 50% of the royalties from 118 wells drilled in the future. The producer has estimated that it has 200 million boe in Granite Wash proved reserves and expects net production to peak in 2013 and 2014.

Apache Corp. also has close to 200,000 (gross) acres in the play, Duffy said. Apache drilled its first horizontal well in the Granite Wash in 2009 and the play is the "latest growth driver" for the company's Midcontinent operations. Apache plans to increase drilling locations to 200 by 2015 from 40 this year.

Cordillera Energy Partners is one of the largest leaseholders in the Granite Wash (108,000 acres) followed closely by Forest Oil (103,000 acres). In addition, Devon Energy Corp., which holds more than 60,000 acres, brought 10 wells on line in the Granite Wash in 3Q2011 and production from the new wells averaged 1,250 boe/d. Total production in the play averaged 16,400 boe/d in the last quarter.

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