On its delayed Q3 conference call, the management of Linn Energy LLC (LINE) and 1099 dividend paying twin, LinnCo LLC (LNCO) expressed a high level of confidence concerning the companies recently announced, improved offer for Berry Petroleum Co. (BRY). From the information provided on the call, it seems very likely that the merger will go through with an approval by the end of this year. And, more importantly for Linn investors, the deal will be a positive for continued distribution growth.
Note: LP 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 MLP units apply including the tax consequences of investing in MLP units.
Berry Merger Update
With the new proposed merger agreement, Berry Petroleum share holders will receive 1.68 shares of LNCO for each BRY share, up from a 1.25 exchange ratio when the offer was first announced in February 2013. At the time of the initial offer, the exchange rate and share price of LNCO valued the deal at $4.3 billion. The latest offer increases the merger value to $4.9 billion, about 15% higher than the 10 month old offer.
For Linn Energy and LinnCo investors, the extra 24 million shares to be exchanged due to the higher exchange ratio shows an increased dilution factor per unit of about 8% on the 303 million LINE shares that would have existed if the merger had gone through at the original exchange rate.
During the Q&A of the conference call, management noted that production and financial results from Berry were much better in Q3 than earlier in the year, and the tax benefits of the merger had improved. So in spite of the one-third higher share exchange rate, the new offer remains positive for Linn Energy and LinnCo investors. During the conference call management stated that if the merger is approved, the deal would be immediately accretive for dividend paying cash flow. I see no reason to doubt that declaration.
Expect Delayed Increase in the Monthly Dividend
Another point that came up during the conference call was that, if the merger is approved, Linn Energy would publish its guidance for 2014 later in the new year than the usual January announcement. The comment was that it would probably take until well into February before the company could work through its models and projections for 2014. I think that Linn has become more conservative about increasing distributions based on future cash flow projections, so I do not expect the current monthly dividend of $0.2416 to start increasing until the second quarter of next year. Investors can expect a higher payout starting in April.
Management was also asked about the new method of calculating distributable cash flow, which I covered in my last article. It was noted that the new method is more in line with GAAP, since DCF is now derived from "Net cash provided by operating activities" - a GAAP number. Results from Q1 and Q2 of 2013 will be restated using the new method. However, management noted, the actual financial results for the recent past were accurate and that the new DCF reporting method just clarifies how Linn accounts for cash flow.
Where To From Here
Management and the analysts on the call expressed confidence, and I am in agreement, that business is back on track for Linn Energy and now investors can base investment decisions on their own goals for income and growth. I would understand that investors and traders who picked up shares in the low $20's earlier this year may want to sell, lock in the gains and redeploy the capital elsewhere. Long term LINE and LNCO holders should be comfortable that things are improving and that the distributions will again start to increase. At some point in the next 6 months I expect the LINE share price to move up to the point where the yield is back around the typical 8% for this company. That means about $36 for LINE and a few bucks higher for LNCO - with its historic lower yield - based on the current $2.90 per unit annual distribution rate.
Final note: My comments concerning management statements were written from memory without access to a printed transcript of the conference call.
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