GSO Capital Partners, a unit of The Blackstone Group L.P. (BX) signed a non-binding letter of intent (DrillCo Agreement) with Linn Energy (LINE) to fund its oil and natural gas development.
Details of GSO Capital’s funding commitment
Under the letter of intent, GSO Capital Partners committed up to $500 million with 5-year availability to finance the drilling programs of Linn Energy.
The independent oil and natural gas company will private the locations of its drilling programs to GSO capital. The DrillCo Agreement is subject to final documentation, adjustments depending on asset characteristics and return expectations.
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GSO Capital agreed to finance 100% of the costs associated with new wells that will be drilled by Linn Energy under the DrillCo Agreement. The credit-focused alternative asset manages is expected to receive 85% working interest the wells until it achieves a 15% internal rate of return on annual groupings of wells.
On the other hand, Linn Energy is expected to obtain a 15% carried working interest.
GSO Capital’s interest will be reduced to 5% while Linn Energy’s interest will increase to 95% upon reaching the internal rate of return target from the wells.
A dynamic alliance
Mark E. Ellis, chairman, president and CEO of Linn Energy said the company’s agreement with GSO Capital creates a dynamic alliance at it combines the world-class expertise of a highly-respected investor with the ability of the company to acquire and develop oil and natural gas assets.
Ellis added that the new strategic initiative was designed to allow Linn Energy to become an active developer of assets.
On the other hand, GSO Capital’s senior managing director, Dwight Scott said, “LINN is a leading operator with an exceptional undeveloped asset base, which is expected to generate significant value for the partnership.”
Advantages for Linn Energy
According to Linn Energy, the DrillCo Agreement with GSO Capital offers the following advantages for the company:
- It allows Linn Energy to develop assets without increasing capital intensity
- It has the potential to add a steady and growing cash flow stream with no capital requirement
- It increases the company’s long-term ability to fund oil and natural gas development capital the distribution from internally generated cash flow
- Mitigates drilling risks
- Potentially broadens acquisition space and provides incremental low decline growth for Linn Energy upon meeting the return hurdle