Investor's in Linn Energy (NASDAQ:LINE) and LinnCo (NASDAQ:LNCO) likely have never been as excited to see an early stock market close as they were Wednesday. In the past session and a half, LINE is down a quick $10 (± 33%), and LNCO $11 (± 27%). While the negative articles from Barron's and the very negative reports from Hedgeye have been well known, the news this week of an informal SEC inquiry by the local office sent investors panicking to the exits. While I'm sure there are a lot of people who are ready to jump into LINE for that yield, which as of Wednesday's close was 12.7%, there's likely another shoe to drop in this saga.
The huge drop in the value of LNCO has not only affected LNCO shareholders, as the shareholders in Berry Petroleum (BRY) have seen the takeover premium from their previously announced merger evaporate as LNCO has collapsed. The merger announcement states that BRY shareholders will receive 1.25 LNCO shares in the deal, which is subject to shareholder approval. While BRY has been falling hard, it hasn't dropped nearly as much as LNCO, and actually ticked a few cents higher Wednesday. As of the close Wednesday, that 1.25 LNCO shares BRY shareholders are entitled to would be worth $33.68. BRY closed Wednesday at $40.10. Since no one in their right mind would vote to receive $33.68 for an asset they could sell for $40.10, this leads me to believe the BRY/LNCO deal is on thin ice, if not dead, and that the market is pricing in BRY getting a higher offer.
Given Berry's size, and the fact that it is essentially "in play" by agreeing to be acquired in the first place, I think the odds of it getting another offer are high. Management is likely looking for a way to save face after putting their shareholders through the circus this has become, and I'm sure the bankers, hungry for another bite of the apple on advisory fees, have already assured BRY's board of directors that an SEC inquiry is more than enough to use the MAC clause to get out of the LNCO merger with little or no penalty.
Without the BRY merger, LINE and LNCO have little excess cash to raise their payouts, and their ability to maintain the payouts over the longer term becomes a serious concern. Additionally, without a strong currency in its unit price, LINE is hampered in the size and quality of acquisition it can do, since mergers using equity as currency will likely be difficult due to all the negative press over the next few years. The negative press really puts LINE in a difficult spot, since the business model assumes they have ready access to the capital markets to raise equity at favorable pricing, which is no longer a given in this environment.
I didn't recommend selling Linn based on the Barron's article in May, and based on the price action, that was pretty awful advice, so I apologize to all who read my article a few months back (here). Both LINE and LNCO are going to be quite volatile over the next few months, as the SEC inquiry plays out, and Hedgeye and Cramer continue to battle on Twitter. Investors waiting to jump into LINE should continue to wait, in my opinion, and instead look at Berry Petroleum, which I believe will see a higher takeover offer from another company before year end. On the flush down Linn will take if BRY gets a competing offer will be when I look for Linn to bottom, but not until then.