Linn Energy LLC (NASDAQ: LINE) and LinnCo LLC (NASDAQ: LNCO) have a non-binding commitment from private equity firm Quantum Energy Partners for up to $1 billion in acquisition spending power.

Subject to final documentation, Quantum has agreed to initially commit up to $1 billion of equity capital to fund acquisitions and development of oil and natural gas assets. Linn will have the ability to participate in all acquisition opportunities with a direct working interest ranging from 15% to 50%.

The agreement brings the total potential size of the alliance to more than $2.5 billion when combined with the ability to leverage the acquisition company AcqCo and Linn’s acquisition of a direct working interest.

Oil and gas properties will be managed by Linn. Additionally, Linn has the ability to earn a promoted working interest and will have a right of first refusal to acquire the properties.

“Once again, Linn has created a unique structure that will greatly benefit the upstream MLP. First, this transaction helps incrementally de-risk Linn’s acquisition story by providing dropdown potential,” said Kevin Smith, analyst, Raymond James. “This structure allows Linn to participate in both larger deals and deals that might not have fit the conventional upstream MLP asset profile. Lastly, this structure potentially provides steady, accretive cash flow through the promote structure.”

Mark E. Ellis, chairman, president and CEO of LinnCo, said Linn and Quantum have a long history of working together.

“As the founding investor in Linn and a leading private capital provider to the energy sector that also participated in the formation of two other upstream MLPs, Quantum is uniquely qualified for this new acquisition alliance,” Ellis said. “Based in Houston, Quantum brings considerable size and scale to source and fund acquisitions, along with the flexibility and responsiveness to be very effective partners.”

Linn said the agreement creates a dropdown entity in which assets can be purchased and harvested on an ongoing basis.

It also:

  • Allows participation in acquisitions outside of the conventional MLP asset profile;
  • Enhances ability to capture acquisition opportunities during distressed market conditions;
  • Provides potentially more accretion to cash flow per unit as a result of the promote structure;
  • Creates a long-term partnership with a private capital provider which is scalable and repeatable; and
  • Provides Linn with the dynamic ability to acquire and finance acquisitions at the most advantageous times.

The partnership will be focused on conventional and unconventional resource development opportunities across the U.S.

For Quantum, the agreement allows the firm to leverage Linn’s existing scale of operations and workforce across multiple basins in the U.S. and creates a long-term partnership with the largest upstream MLP, with the ability to develop and then monetize mature assets efficiently over time.

So far, in 2015, E&P companies are in a wait-and-see mode on deals. Depressed economics in the oil field have translated into confusion in the A&D marketplace.

Deal activity has declined dramatically, and spending in first-quarter 2015 is about 85% lower than fourth-quarter 2014. Deal activity should pick up in second-half 2015; however, given the appetite for the best assets, bargain hunting will be difficult, Wood Mackenzie said March 24.

In first-quarter 2015, deal values have withered. Wood Mackenzie expects the Lower 48 M&A market to remain depressed until participants reach consensus on oil price and appropriate financial metrics.

U.S. shale oil has shown it’s at the top of the non-OPEC hierarchy, said Subash Chandra, analyst, Guggenheim.

Eventually, it should attract investment.

“U.S. shale oil is no longer a science experiment or a niche product, rather it is the only source of short-cycle, non-OPEC oil growth,” Chandra said.

Success in the U.S. has failed to be replicated in other countries and shale plays have demonstrated equal or better production capacity than deepwater projects.

“We expect M&A interest to pick up as buyers acknowledge the resource potential, scalability, short-cycle, fiscal stability and low political risk of U.S.,” Chandra said.

Smith also said the oil and gas acquisition market will likely be very active in the second half of the year and will put the Linn/Quantum pact to work before the end of 2015.

“There is currently no visibility into the timing and the amount that the equity commitment will be utilized over the next 12 months,” he said. “However, we view it as a strong positive that a leading private equity company is willing to make a multiyear commitment to Linn.”

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.