There is no doubt about it that natural gas prices are still depressed, and given the vast amount of supply, it may take a while for prices to rise again. So Linn Energy's (LINE) acquisition of Berry Petroleum (BRY) makes plenty of sense.
Linn will be paying $4.3 billion including debt assumption to buy Berry. Berry's liquid mix is 75% oil and 25% gas. The favorable mix will help Linn focus more on oil, which is known to have significantly higher selling prices.
The acquisition is said to be fairly accretive for unit holders. Management believes the acquisition will add 40 cents to each unit. Linn has also decided to increase the current dividend by 6 percent to 77 cents per unit.
It is pretty clear that management is raising the dividend because it realizes this acquisition will mean more cash flow for the company. Given its tax structure, the company will have to increase its payout down the line.
With the new dividend increase, the yield for Linn will stand at 8.17%. The majority of this will remain as a return of capital, therefore, investors will effectively have a tax shield. The Berry acquisition will help increase the dividend, while shareholders can still be protected by the fact that the company is technically only returning capital. This is a great way for investors to grab some yield.
Linn's acquisition of Berry shows that the company is making the step to increase its mix toward oil rather than gas. This move to higher margin liquids will be great going forward. If management continues with this strategy, dividend investors may not only see distributions rise, but the share price could very well appreciate.