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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