Linn Energy LLC celebrates its 10th anniversary this year, coming off a stellar 2012, its fastest-growth year yet. In 2012, Linn spent about $2.9 billion on a series of asset acquisitions, including buying the storied Hugoton and Jonah natural gas fields from BP. It also completed the third-largest initial public offering of the year and the largest energy IPO, raising some $1.3 billion for a new entity, LinnCo. This offering positioned the Houston company for an industry first—the first LLC to buy a C-Corp, Berry Petroleum Co., for some $4.3 billion, including debt.

At the helm is Mark Ellis, who joined Linn Energy in December 2006 and is now chairman, president and chief executive officer. Ellis is a petroleum engineering graduate from Texas A&M University, where he advises the petroleum engineering school.

For his many accomplishments in 2012 that affected the company and the industry, Ellis has been named Oil and Gas Investor's Executive of the Year for 2012.

Investor You call the IPO of the new entity, LinnCo, a game-changer. Why?

Ellis LinnCo was designed to do a couple of things. On our acquisitions, we typically fund them with 60% equity and 40% debt. The sizes of the deals we've done lately were getting too big for that funding structure. Equity offerings normally target the retail side of the business, so it's very difficult to get the size of access that we need from the retail sector for larger transactions. LinnCo is designed to speak to the institutional side with deeper pockets. It creates a yield vehicle with a 1099 in lieu of the Linn Energy K-1 partnership.

The LinnCo offering was 83% institutional and 27% retail. It was actually oversubscribed and priced well. This gave us the ability to have a trading security that can be used as currency in future transactions.

Investor You then waited a few months for the value of the new shares to be determined by the market, before using them to buy Berry.

Ellis That might be the market's perspective. Yes, LinnCo is a new vehicle, but it has the track record of Linn Energy behind it. LinnCo is not designed to be a drop-down vehicle. The assets we buy pass through it and end up at Linn Energy, not LinnCo.

Investor Do you think the market understands the differences between the two?

Ellis It is taking a bit of education in the market, but now that we've announced the Berry transaction, I think they get it. We still have the ability to acquire assets through Linn, and we will do that as we always have, but now we have another suite of opportunities through acquiring C-Corps with LinnCo.

Investor You already claim to be an acquisition machine.

Ellis Yes, we have become that. In 2012, we screened 246 opportunities and bid on 20.

Investor How do you integrate it all once a deal closes?

Ellis When we closed the Hugoton transaction earlier in 2012, we were already prepared to take over the physical assets. Their employees became Linn employees within 90 days following closing, and we quickly integrated accounting systems. We do not want to run parallel accounting systems. Right on the heels of the Hugoton transaction, we did the Jonah deal. Both deals were fully integrated by year-end 2012. As far as Berry, we expect to close on or around July 1, and the accounting might take us until November before we roll all that in.

Most people look at us and ask, “How do you do that so fast?” Our integration team is separate from the team that evaluates assets and makes an acquisition. They work in parallel to make the integration process more efficient.

Investor But Berry is an entire corporation. Isn't that going to be different?

Ellis Immediately after we announced the Berry deal, we headed to California to meet with their entire Bakersfield operation the next morning. We wanted to let them know how we do business and what this transaction might mean to them personally once closed.

After that, we went to their Denver office and also met with the folks in Utah and the Permian, their other asset areas. We met with them as soon as possible and made commitments in terms of when they could expect to hear from us about their futures. They know right away if they do or do not have a job and their level of compensation subject to the transaction closing; they understand they are working on the same assets as before, just with new leadership. They can continue to run their basic business.

Investor But a merger is more complex.

Ellis When you announce a merger agreement, you've already decided on the terms and conditions, the valuation, but not a lot of the personnel issues. Those preliminary discussions occur shortly thereafter. You start engaging a broader group of management at that time.

In the Berry transaction, we didn't have a large California presence before, and they had steamfloods and the diatomite play that we didn't have, so it was important to retain those personnel in Bakersfield.

In asset deals like the one we did with BP, you get access to the field personnel but not necessarily the technical support staff such as engineers and geoscientists.

Investor Buying more natural gas doesn't bother you?

Ellis We bought two very long-lived, low-decline gas assets that give us optionality for some time. A theme here is that they are all low-decline assets, even those owned by Berry that are more oily—Hugoton has a 7% decline and Jonah was 14%. These very mature assets help lower the aggregate decline of the company. It helps temper the higher spending we've embarked on in the Granite Wash, for example.

When we buy assets, we lock in commodity prices for five years through hedging, which stabilizes cash flow. So, we are somewhat agnostic on the commodity. We try not to take much commodity price risk. Hugoton was hedged in the high $4's.

Investor Longer-term, what is your prediction for the Hogshooter assets?

Ellis Hogshooter is an interesting development. Last April, we drilled our first well, but we were not the pioneer in this play. Our first three wells were successful, so we followed that up with another eight that were successful. But toward the end of the year, we had some wells that were, for lack of a better word, disappointing…they underperformed our expectations. We scaled back activity in the Texas Panhandle and moved over to the Oklahoma side, where we've had some great success…we are very encouraged in the results we've seen there.

We still have about 20 wells in inventory in the Texas Panhandle. I am not condemning it, but that program is in “time-out” while we pursue the Hogshooter in Oklahoma where our inventory is expanding rapidly. I'd like to see us do a little more science before we go back to Texas.

Investor Which of your plays is most promising in terms of near-term growth?

Ellis Keep in mind that what drives our growth is more transactional growth than drillbit growth. We want to de-emphasize or moderate the drilling growth and expand acquisition growth. We think we're in a high-opportunity position for asset transactions and even corporate transactions.

That said, the plays that compete for our capital are still the Granite Wash, the Williston Basin (all non-op), and the Wolfberry play in the Permian. We are starting to step into Jonah Field, with one rig running in Jonah. Once we close the Berry transaction, we'll look really hard at all of our development opportunities. We may shift capital away from some of the heritage Linn assets over to the Berry properties. Most of the capital optimization work will occur within the 2014 budget process.

Investor For an LLC, you seem to be doing more drilling.

Ellis The real development activity started in earnest in 2010 in the Granite Wash, to allow us to transition from an $8-gas world to a $5-hedge world. We saw that coming, and knew we had to grow volumes to have the cash flow necessary for maintaining our distribution.

We have moved from being an acquire-and-optimize company to now acquire, develop and optimize. Building the Permian also expands our development drilling side.

When you look at 2012, we built our organization and built production to sustain our distribution and even raised it 5%. Now the focus is again on accumulating mature, low-decline assets. I'd still like to see two-thirds of our growth coming from acquired assets and the rest through development. We're looking at about 10% organic growth in 2013, which is healthy given our size.

Investor What are the biggest challenges ahead?

Ellis We've had such great success growing our business, that we do think about competitive pressure, others competing with us for assets. My challenge internally, with an organization that's getting bigger and bigger, is to keep our culture and the values of a smaller, entrepreneurial company. But there's no doubt we are getting bigger. We'll have more than 1,500 employees after Berry closes.

Investor And more oil.

Ellis We will be about 54% oil and liquids. It's good, high-margin oil, which is important to us. We're not shooting for a specific percentage of liquids to gas, but it pretty much does balance us out, and Berry has a 16-year reserve life. We like that.

For more on the Linn Energy-Berry deal, see “Linn's C-Corp Strategy” in the April 2013 issue.