The horizontal Granite Wash has the potential to double Houston-based MLP Linn Energy LLC, (Nasdaq: LINE) in the next three to five years—an "amazing" feat for a $7-billion company, according to Raymond James Equity Research.

Raymond James recently participated in a series of investor meetings with the Linn management team, which boosted its already positive outlook on the yield-oriented, growth company, analyst Darren Horowitz said in a Sept. 27 research report. The firm has upgraded its rating on Linn from Outperform to Strong Buy, and has also increased its target price to $38.

"Linn currently possesses one of the greatest money-making machines in the oil patch," Horowitz notes in reference to the company's horizontal Granite Wash drilling program. "This program is delivering financial projects that have 30- to 40-year cash flow streams," he adds.

The analyst further underscores that one of the recurring themes from its positive investor meetings with company management was the magnitude of impact the liquids-rich play would have on production growth.

Encouraging IP Rates

"To put this into perspective, Linn entered 2010 producing roughly 215 million cubic feet equivalent per day (MMcfe/d)," says Horowitz. "The company's first four operated horizontal Granite Wash wells had a gross initial production rate of 142 MMcfe/d, or roughly 70 MMcfe/d net."

In June, Linn reported an initial production rate of 19.4 MMcfe/d from its first operated horizontal Granite Wash well in the Texas Panhandle. McMahan 22-2H tested a production rate of 10.8 million cubic feet and 634 barrels of condensate per day during a 24-hour period.

Continuing its success in the Granite Wash trend, Linn reported in July that its second operated horizontal Granite Wash well had produced approximately 60.2 MMcfe/d, following an initial production rate of 27 million cubic feet of gas and 3,190 barrels of condensate per day. Black 50-1H is expected to yield 3,530 barrels of natural gas liquids per day, the company said in an official statement on July 22.

In September, Linn reported its results from its third and fourth operated horizontal Granite Wash wells. Stein 1-3H well tested at a 24-hour production rate of 37.2 MMcfe/d, with production comprising 19 MMcf/d and 1,487 barrels of condensate per day (B/d) at 1,510 psi flowing surface pressure. Thomas 5-8H well tested at a 24-hour production rate of 26.2 MMcfe/d, comprising 16.3 MMcf/d and 640 B/d at 1,350 psi flowing surface pressure.

Linn anticipates drilling/participating in 22 horizontal Granite Wash wells in 2010, Linn president and chief executive Mark Ellis confirmed in a Sept. 7 press release. Additionally, the company plans to increase its operated rig count in the play to four in 2011.

The average liquids component of the production stream on Linn's four operated wells is more than 60%, of which a significant portion is condensate. "As a result, all of these wells will generate rates of return that should exceed 100%," Ellis also noted.

Unequaled Capital Efficiency Rate

"After 11 quarters of flat distributions, Linn's horizontal Granite Wash program has fundamentally altered the company's organic growth rate from 3% to 5% to north of 20%,” Horowitz continues.

As a result, Raymond James is now forecasting that the company's distributions will increase 3% to 5% per year for the next few years.

Horowitz adds, "With the partnership's organic cash flow growth expected to exceed its distribution growth, we believe the partnership will be able to grow its distribution coverage ratio even faster."

Furthermore, "once the Granite Wash's impact fully kicks in, the partnership expects to be able to organically grow its earnings before interest, taxes, depreciation, depletion and amortization (EBITDA) and distributable cash flow at 25% per year while spending around 40% of its EBITDA on capex—a capital efficiency rate unequaled in the E&P industry," the analyst concluded.