Toughing it out over the past three years of energy uncertainty hasn’t been fun for oil and gas companies, and it’s been even harder for those having to remake themselves. Former MLPs were among the hardest hit, with some converting to LLC status before finally falling into bankruptcy. Few have made it to the finish line and become growth vehicles.

Linn Energy Inc. has successfully made the metamorphosis, emerging from Chapter 11 restructuring in February of last year. As of its third-quarter earnings statement, it had announced or closed on more than $1.5 billion of asset sales. Its debt had been eliminated, and it had $32 million of cash on the balance sheet and an undrawn $500-million credit facility. Further, the company had begun a stock buyback.

Earlier, Linn said it was transitioning to life as “a low-cost, streamlined, growth-oriented enterprise.”

Roan Resources LLC formation

Since then, it has formed a joint venture (JV) with Citizen Energy II LLC to prosecute operations in the Merge, Scoop and Stack. Each party is contributing 70,000 net acres for a total of 140,000 net acres. Of this, 103,000 net acres are in the Merge, making the JV the largest acreage holder in the play. Linn CEO Mark Ellis said the closing of the JV to form Roan Resources LLC marked a “major milestone” for the company.

Named to lead Roan is CEO Tony Maranto, most recently vice president in charge of Midcontinent operations for EOG Resources Inc. Headquartered in Oklahoma City, Roan has established a new credit facility with an initial borrowing base of $200 million. Its production in September totaled some 23,500 barrels of oil equivalent per day (boe/d) and is forecast to grow to 40,000 boe/d by year-end.

Citizen and Linn clearly have high expectations for Roan—including a planned IPO, subject to market conditions, in 2018.

“We are extremely excited about the growth prospects of Roan,” commented Ellis on Linn’s third-quarter conference call. As of mid-November, Roan was operating five rigs, with plans to add a sixth rig later in the year, and had accelerated the pace of activity by going from three frack crews to four. In addition, Roan had 25 wells that were drilled but uncompleted entering the fourth quarter.

In announcing the JV with Citizen, Linn estimated that the venture had more than 1,500 net drilling locations—with potential upside to that number from downspacing and additional benches—representing more than 20 years of development assuming a six-rig program. The field-level cash margin was estimated at $18/boe, assuming commodity prices of $45 per barrel and $3 per million British thermal unit. Estimated total reserve potential, according to the company, was more than 2 billion boe.

Evan Lederman, chairman of Linn’s board of directors, described the formation of Roan “as a game-changing transaction for Linn that creates a scaled Merge/Scoop/Stack pure play that competes with the very best unconventional opportunities in the country.” He went on to say that the JV offered the “latest and most impactful example of the Linn board of directors working with its management to maximize value for its shareholders.”

Rarely are board members as active as those at Linn, but this reflected the company’s restructuring history. The Linn board is composed in large part of representatives of shareholders whose original distressed debt positions came to be equity positions as a result of the restructuring process. It was the case with four of the six Linn board members.

In addition to serving as chairman, Lederman is a managing director and co-head of restructuring at Fir Tree Partners. Other board members include Matthew Bonanno, a partner with York Capital Management; Philip Brown, a partner with P. Schoenfeld Asset Management; and Andrew Taylor, a member of the investment team with Elliott Management Corp. A common theme is their experience in working in distressed debt and restructuring situations.

A “consistent presence”

Fir Tree is reported to have about $13 billion of assets under management and is described in a recent Thompson Reuters article as “the most consistent presence in these reorganized energy companies.” Lederman also sits on the board of Amplify Energy Corp. (formerly Memorial Production Partners LP). Chairman of the Amplify board is David Proman, who, like Lederman, is a managing director and co-head of restructuring at Fir Tree.

Fir Tree is involved in a number of E&Ps. It is reported to have a 36.38-million-share stake, or 18.5% of shares outstanding, in Ultra Petroleum Corp, as well as holdings in Midstates Petroleum Co., SandRidge Energy Inc. and Gastar Exploration Inc.

With these instances of board seats often being held by experienced restructuring professionals, it is not hard to see why maximizing shareholder returns is a top priority. Certainly, that has been the case with Linn.

Of course, the first step for Linn was righting the ship was to fix its balance sheet. The more significant asset sales included divesting its western Wyoming properties to Jonah Energy LLC for $581.5 million, as well as selling its interest in San Joaquin Basin properties for $263 million. Later sales included its properties in Brea-Olinda Field for $100 million, Washakie properties for $200 million and Williston holdings for $285 million.

As noted earlier, the collective proceeds of these closed and pending asset sales exceeded $1.5 billion. As of mid-November, Linn said it expected further asset sale announcements by year-end, given the marketing process already underway of its remaining Permian Basin assets and interest in Altamont Bluebell Field in Utah. In addition, the company expects to market its mature waterfloods in Oklahoma and its interest in Drunkards Wash Field in Utah.

Linn’s capex for 2017 was set at $360 million. This included monies spent on assets that were later divested, as well as the assets contributed to the Roan JV. Some $134 million of capex was allocated to the JV, comprising $72 million for development and $62 million for leasing. Linn’s remaining oil and gas assets, with an estimated 9% annual decline rate, had a capital allocation of $69 million.

With “very low capital spending” expected to maintain production flat, where is Linn expected to focus its efforts outside of the Roan JV?

Northwest Stack activity

In addition to its Roan acreage, Linn holds 105,000 acres in the Northwest Stack, where offset operators include Continental Resources Inc. and Chesapeake Energy Corp. In its September presentation at the Johnson Rice & Co. energy conference, Linn showed numerous wells by offset operators that had IP-30 rates in excess of 1,000 boe/d. Targets are the Osage and the Meramec. Linn’s acreage is mainly in northern Blaine and Major counties, and the company is evaluating deploying a rig to test the potential of its acreage in 2018. More than 70 industry rigs were active in the area last September.

“We continue to see increased activity in the area and are well-positioned to capitalize on this emerging play,” observed Ellis.

In North Louisiana, Linn drilled two operated wells in the third quarter to test the upper and lower Red formations. Elliot 1H was completed in the lower Red and had an IP-30 rate of 11 million cubic feet per day (MMcf/d), while JP Graham 2H was completed in the upper Red and had an IP-30 of 19.4 MMcf/d. Choke management was applied to both wells.

Linn said it was “extremely excited” by the results of the two wells, in which it has a 71% working interest. The company has concentrated acreage positions in two key areas, Ruston and Calhoun, with a combined 27,000 net acres. Its overall net production in North Louisiana was about 31 MMcf/d in the third quarter. Just more than half of the roughly 200 wells were operated by Linn.

In East Texas, the company is in the process of testing the Cotton Valley Lime and Bossier formations in two operated wells. Initial flowback operations were underway on both wells as of mid-November. Overall net production was 50 MMcf/d in the third quarter (94% natural gas), with an annual base decline of about 11%.

In a September report by Johnson Rice, analysts forecast that Linn’s 2018 drilling and completion budget would be divided between North Louisiana (roughly 60%) and the Northwest Stack (40%). Roan, now set up as an independent company, will be self-financing. However, further midstream investments by Linn are expected to serve the acreage that it contributed to the JV, but which remains dedicated to its Chisholm Trail midstream business.

Roan IP-30 rates

Still, the most tangible upside is in the acreage held by the Roan JV. The holding mainly straddles the Canadian-Grady County line and has been productive from the Woodford and Sycamore formations. The Johnson Rice conference presentation showed a number of wells by Linn and its JV partner Citizen, as well as several offset operators, that had IP-30 rates of more than 1,000 boe/d—but also half a dozen wells with IP-30 rates in excess of 2,000 boe/d. The latter were mainly Sycamore producers, with one having an IP-30 rate of more than 3,000 boe/d (73% oil). There were 18 active rigs in the area at that time.

Linn’s 70,000 net acres contributed to the Roan JV remain dedicated to the Chisholm Trail midstream facility just outside Tuttle, Okla. As of mid-November, the facility had 30 miles of pipe and 60 MMcf/d of refrigeration capacity with an additional 20 MMcf/d of offload capacity. Expansion plans call for additional gathering and compression and construction of a state-of-the-art cryogenic plant to improve NGL recovery. The plant, with a total capacity of 250 MMcf/d, is expected to be commissioned in the second quarter of 2018. The company allocated $106 million in capex to midstream in 2017.

These midstream operations are clearly viewed as another path to growth for Linn through its Blue Mountain Midstream LLC subsidiary, the parent of its Chisholm Trail facility.

“Through our evaluation of marketing options for our growing Merge development program, we saw an opportunity to create additional value by aggressively developing our own midstream business in the heart of this emerging play,” said Ellis on the third-quarter conference call.

“While Roan’s dedication on its own provides a tremendous organic growth opportunity, Blue Mountain Midstream is pursuing additional third-party dedications to accelerate throughput growth for the new facility. We are also actively evaluating potential strategic initiatives with respect to Blue Mountain and are excited about its future potential as another high-growth asset in our portfolio.”

As with other assets that can be retained for their growth potential—or monetized, if that offers greater value—the key objective is to maximize shareholder value.

Linn’s board believes its thinly traded stock does not as yet fully reflect the value of its existing assets in its new corporate structure. As the company has paid down and now eliminated debt, it has strengthened its balance sheet to the point that it has been able to authorize stock buybacks. From an initial $7-million authorization in June of 2017, it has successively raised the buyback to $200 million and subsequently $400 million.

As of Oct. 31, 2017, the company has bought back 5.2 million shares for roughly $179 million, or about $34.52 each. Roughly $220 million remains of the $400-million authorization.

Linn Energy had more than $1.5 billion of net cash proceeds or signed purchase and sale agreements during 2017.