Aggressive Portfolio holding Linn Energy LLC (NSDQ: LINE) today announced a $1 billion deal to purchase about 12,000 net acres in Wyoming’s Jonah Field from BP (LSE: BP, NYSE: BP). This acreage includes about 750 producing wells and contains an estimated 730 billion cubic feet of natural gas equivalent reserves, roughly 56 percent of which is proved, developed and producing. Natural gas accounts for about three-quarters of production, with natural gas liquids accounting for the remainder. 

By buying these properties at dirt-cheap prices and hedging expected production from these fields for the next six years, Linn Energy ensures that ultra-depressed natural gas prices won’t prevent the firm from earning a solid return. This strategy enables Linn Energy to lock in a fixed profit margin on production and limits exposure to fluctuations in commodity prices.

Management expects the transaction to be immediately accretive to cash flow and should give the limited liability company (LLC) the scope to grow its quarterly distribution later this year.

Linn Energy also announced that the firm has filed a registration statement with the US Securities and Exchange Commission to list LinnCo, a related company that will use the proceeds of its initial public offering (IPO) to purchase equivalent number of shares in Linn Energy.

We have received a number of questions from readers about this deal. The transaction won’t be dilutive to Linn Energy’s existing unitholders, nor will investors in the LLC receive units of LinnCo when the corporation goes public–the IPO isn’t a spin-off.

Structured as a corporation rather than a partnership, LinnCo will pay qualified dividends; investors will receive the familiar Form 1099–not form K-1–from the Internal Revenue Service when tax season rolls around.

Shares of LinnCo will appeal to foreign and institutional investors that face tax-related complications when they hold securities that pay distributions instead of qualified dividends. The IPO will allow these investors to build exposure to Linn Energy while avoiding these tax headaches and other restrictions.

Meanwhile, individual investors can hold shares of LinnCo in their IRA or 401(k) other tax-advantaged account without worrying about unrelated business taxable income.

Linn Energy’s existing unitholders will benefit the deal because the IPO of LinnCo provides the upstream LLC with yet another avenue to raise capital for additional acquisitions and organic growth opportunities.

We expect other publicly traded partnerships to copy this innovative transaction as a means of raising capital from investors that have sat on the sidelines because of regulatory restrictions and tax-related issues. Yielding 7.9 percent, units of Linn Energy LLC rate a buy under 40.