A very short press release from Linn Energy LLC (LINE) has given both the markets and investors strong indication that the company has left the negative events of the last few months in the past and a more profitable future is about to start. It appears that the merger with Berry Petroleum (BRY) is still on track and may become finalized within the month.
Note: limited partnership companies such as Linn Energy have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of LP units apply including the tax consequences of investing in LP units.
Merger Vote Scheduled
The September 11 press release is very short so I think it is easiest to reprint the meat of the release here:
"LINN Energy, LLC , LinnCo, LLC (NASDAQ:LNCO) and Berry Petroleum Company announced today that LINN Energy and LinnCo recently received comments related to the Amended Registration Statement on Form S-4 filed on August 9, 2013, in connection with the proposed merger transaction, and are working diligently to file an Amended Form S-4. Furthermore, LINN Energy, LinnCo and Berry Petroleum have agreed to set the record dates for their respective unit holders, shareholder and stockholder meetings as of September 30, 2013."
Reading between the lines, I interpret the statement as saying that the comments received concerning the last S-4 give the company's the go-ahead for the merger. If not, the shareholder meetings would not have been scheduled for the end of this month.
Where To From Here?
It almost seems hard to believe that it was just early May when the LINE unit price was trading one-third higher, close to $40, and LinnCo LLC shares were up in the low $40s. At that point the short sellers' contentions that something was fishing with Linn's hedging and cash flow accounting practices gathered momentum, and the sell-off knocked off about half of the two Linn companies' market values with the LINE share price bottoming out just above $20. The switch from quarterly to monthly dividends probably kept the unit prices from dropping even further.
To finally vote on the Berry Petroleum merger should put the negative events of the last 5 months into the history books and allow LINE and LNCO to restart what had been the companies' rewarding of investors with a steady and increasing distribution history.
I think it is important to note that the Berry Petroleum merger will be the first ever acquisition of a C-corporation by a limited partnership company. Because of the "it's not been done before" nature of this merger, in my mind it was not always clear that the SEC would approve the deal. Today's press release seems to have put those concerns to bed. Looking back on the last 8 months of my notes and articles, it is interesting to read that when the merger was announced, the companies expected to close the deal by the end of June 2013.
Assuming the merger is approved at the end-of-month share/unit holder meetings, I expect the share price of Linn Energy to move up so that the current $2.90 per unit annual dividend provides a yield of 9% or lower, down from the current 11% yield. Nine percent is more in-line with the higher quality E&P MLP yields such as Vanguard Natural Resources LLC (VNR). To get the yield to drop to 9%, the LINE unit price would rise to about $32. If LNCO follows its history, the shares should rise to about $35. It is very possible that LINE and LNCO could hit these values by the time of the shareholder vote at the end of September. The Berry Petroleum share price in the low $40s seems to indicate that Berry investors - who get 1.25 shares of LNCO per BRY share unless the deal changes - expect LNCO to be in the mid $30s by the time the merger closes.
Longer term, I expect Linn to hold the dividends at the current rate through the end of the year, as the nuts and bolts of the Berry merger are worked out. If the third quarter earnings report shows that Linn has straightened out some of the productions issues encountered in the second quarter, I predict that the dividend rate will be increased starting with the January monthly distribution.