Houston-based LINN Energy has secured a $500 million investment from Blackstone’s GSO Capital Partners to fund drilling over the next five years, the company announced on 2 January, as part of its 2015 budget statement. The investment – a form of convertible debt – will fund and oil and natural gas drilling programs (the DrilllCo Agreement).
GSO will fund 100 percent of the costs associated with new wells drilled under the DrillCo Agreement in return for an 85 percent working interest in the wells until it achieves a 15 percent annual IRR on groupings of wells, the statement said. Upon reaching the return target, GSO's interest will reduce to 5 percent, with LINN's clawing back the difference.
“We are extremely pleased to announce a new strategic initiative today designed to allow LINN to be an active developer of assets with growth capital funded from a new financial partnership with GSO,” Mark Ellis, chairman, president and chief executive of LINN, said in a statement. “This agreement creates a dynamic alliance, combining world-class expertise from a highly respected investor with LINN's ability to acquire and develop oil and natural gas assets,” he added.
Dwight Scott, senior managing director of GSO Capital, also commented: “We are excited to partner with LINN as it continues to grow its business. LINN is a leading operator with an exceptional undeveloped asset base, which is expected to generate significant value for the partnership.”
The agreement takes some pressure off LINN’s balance sheet, allowing it to continue to drill new wells, without the need to raise the capital upfront, independently. The deal also potentially broadens the acquisition universe, the statement said.
The company’s announcement outlined a 53 percent reduction in oil and natural gas capital expenditure to $730 million, reduced from approximately $1.55 billion in 2014, and a reduction of the LINN distribution and LinnCo dividend to $1.25 per unit or share, from the previous level of $2.90 per unit or share, on an annualized basis. LINN expects to fund its 2015 capital program, including distribution but excluding drilling, from internally generated cash flow.
“After careful consideration, LINN's senior management proposed and the Board of Directors approved a 2015 budget that contemplates a significantly lower current crude oil price than in 2014. In order to solidify the company's financial position and regain a useful cost of capital, we have reduced the oil and natural gas capital budget and distribution while balancing cash flow and spending,” Ellis commented.
LINN Energy is an independent oil and gas exploration and production company.
GSO’s move comes at a time when of increased volatility and plummeting prices in oil forced down the stock price of Nasdaq-listed LINN. The company’s shares were boosted by the GSO deal announcement: jumping from $9.74 to $11.48 on 2 January. They recently dropped significantly from $23.54 in November and a peak of $33.56 in February. The boost came as oil prices fell to fresh multi-year lows on Monday afternoon (5 January). Brent crude, the international standard, fell to $2.67 to $53.75 a barrel while the US benchmark, West Texas, also fell over $2 to $50.55, according to a report by The Financial Times.