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Linn Energy Adds TX, Appalachian Assets, Increases Reserves by 57%

Linn Energy LLC is spending $454 million in separate transactions to acquire a leasehold in the Texas Panhandle and to enrich its natural gas-heavy assets in the Appalachian Basin. The acquisitions together increase the limited partnership's total proved reserves by 57%, with the addition of more than 355 Bcfe to its proved reserve base and an increase in production of more than 38 MMcfe/d.

The company will pay $415 million to acquire the Panhandle assets from a privately held Texas-based producer and spend another $39 million for the Appalachian assets. The transactions are slated to close by Feb. 1.

Before the announcement, Linn Energy's proved reserves totaled 474.3 Bcf, with 65% natural gas. The company operates and gathers more than 90% of its production, and it now has 3,670 producing wells with a 30-year-plus reserve life index. Before the announcement, Linn Energy's enterprise value was estimated at $1.5 billion, which included $1.1 billion in equity market capitalization and $0.4 billion in total debt.

The CEO said Thursday the latest transactions put the company's value closer to $2 billion and add an important element to its growing asset base.

"This gives us a foothold in four basins...the Panhandle, Appalachian, in Oklahoma and in California," CEO Mike Linn told NGI. "This is what we were wanting to do...become more diverse, add more leases."

The Texas Panhandle assets, bought from an undisclosed seller, include a legacy field with an 80-year production history and hold a growth potential of 15-25% from additional drilling and pipe opportunities, the company said. More than 820 producing wells are located on the assets, with an estimated 30-year reserve life. Linn Energy estimated there are 55 MMboe of proved reserves and are more than 50% proved developed. The assets are 55% natural gas liquids (NGL), 35% natural gas and 10% crude oil.

The new Appalachian assets, 99% natural gas, are located in West Virginia. More than 55 wells are now producing, with an estimated 25-26 Bcf of proved reserves. Linn estimated the assets have a 25-year reserve life index, with "significant additional drilling opportunities." Linn Energy currently leases 145,686 net acres in the Appalachian Basin, spread across New York, Pennsylvania, West Virginia and Virginia.

Linn has identified more than 373 proved undeveloped drilling locations and 532 additional drilling locations on its Appalachian leasehold. At the end of 3Q2006, Linn had identified more than 1,030 total drilling locations in the basin, including 391 locations with proven undeveloped reserves.

Earlier this year, Linn Energy paid Blacksand Energy LLC $291 million for about 31.3 MMboe of proved oil reserves located in the Los Angeles Basin and paid Kaiser-Francis Oil Co. $125 million for 55 Bcfe of proved gas reserves in Oklahoma (see Daily GPI, July 26). The CEO said the company plans to add "significant" hedges on all of the additional production for up to five years.

The transactions are part of Linn Energy's plan to grow and become more diverse, said the CEO.

"We were about 65% natural gas, and we've got a mix now. We've added some NGLs, more gas, 10% oil, all long life reserves. There are about 1,600 drilling sites, with low-risk drilling opportunities. The Panhandle assets are very similar to our Appalachian assets, and we expect we'll have three drilling rigs year round in the Panhandle much like we do in the Appalachias. What all of these assets give us is diversity."

Linn Energy launched the first initial public offering in 2006 as it moved to become a limited partnership. U.S. limited partnerships are similar to Canadian Royalty Trusts, but master limited partnerships have been the more traditional avenue for energy companies considering partnerships for some assets. However, Linn said he believes more energy producers may begin to consider converting assets into limited partnerships because of the tax advantages.

"I really think more companies will do this," he said. "This appeals to the demographics. Younger people are looking for a dividend yield that gets deferred for years, and if you can offer someone 6.5% for several years, they are interested. Right now, this is a small part of the U.S. market, but I think it will grow."

Linn Energy has made some headlines this year, and the CEO said more are to come. Just last month, Linn Energy moved its corporate headquarters to Houston from Pittsburgh. The Pittsburgh office continues to staff all of Linn Energy's Appalachian Basin professionals, and the CEO commutes between the two cities. But Houston is where it's at for oil and gas deals and to attract more energy staff, Linn said.

"Let's face it, Pittsburgh's not an oil and gas town, and we needed to be able to attract some new folks. Our move also puts us in the mix of things as far as acquisitions, knowing what's going on. I fully expect us to do more acquisitions in the future."

The new Panhandle and Appalachian assets will add incremental earnings before interest, taxes, depreciation and amortization (EBITDA) of $75-85 million in 2007 and $95-105 million in 2008. About $10-12 million will be added to its maintenance capital expenditures to exploit all of the properties. Beginning in 2Q2007, the purchases are expected to increase its annual cash distribution rate by 10% to $2.28/unit from the estimated 4Q2006 rate of $2.08/unit.

The acquisitions are expected to provide an increase in Linn Energy's borrowing base under its credit facility to $675-700 million from $480 million. To fund both acquisitions, the company privately placed $360 million of equity securities with third party investors, consisting of 6.7 million units and 7.5 million class C units. at a blended price of $25.50/unit. The class C units represent a new class of equity in Linn, and if approved by a unitholder vote, will convert into units on a one-for-one basis. Linn plans to hold a special meeting of unitholders to consider the conversion by June 30.

The private placement investor group was led by Zimmer Lucas Partners LLC and co-led by GPS Partners LLC and Lehman Brothers MLP Partners LP. Other investors included the Principal Strategies Group of Goldman, Sachs & Co., Alerian Capital Management LLC, RCH Energy and funds managed by Fiduciary Asset Management LLC. Lehman Brothers Inc., Citigroup Global Markets Inc., RBC Capital Markets Corp. and Jefferies & Co., Inc. acted as lead placement agents in the private placement. Jefferies Randall & Dewey acted as financial adviser to Linn Energy in the Texas acquisition.

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