LinnCo And LINN Energy Make An Excellent Deal Acquiring Berry Petroleum

| About: Linn Energy (LNGG)

Shares of LinnCo (LNCO) and LINN Energy (LINE) rose 5.4% and 2.8% in Thursday's trading session, respectively. LinnCo, which indirectly focuses on the development and acquisition of oil and natural gas properties and LINN Energy announced the acquisition of Berry Petroleum Company (BRY).

The Deal

LinnCo announced that it has agreed to acquire Berry Petroleum, an independent energy company focused on the development and exploration of oil and natural gas. Shareholders in Berry Petroleum will receive 1.25 shares of LinnCo shares for each share of Berry Petroleum they currently own.

LinnCo is a publicly listed holding company, which solely holds participation units in Linn Energy. LinnCo's offer values Berry at $46.2375 per share, a premium of 20% compared with the day before the offering. Including the assumption of debt, the deal values Berry at $4.3 billion.

Berry's long-life and low-decline assets are an excellent fit for LinnCo according to the company's presentation. With the acquisition LinnCo can report meaningful growth in California, the Permian Basin, East Texas, and the Rockies.

The deal will increase production with roughly 240 MMcfe/d, or approximately 30%. Proven reserves of 1.65 Tcfe are 75% based of oil, thereby boosting LinnCo's total reserves by 34%, the majority of which is oil. Additionally, Berry's 3,200 producing wells across 200,000 net acres could boost possible reserves by another 3.8 Tcfe.

CEO and Chairman Mark E. Ellis commented on the deal, "This transaction creates tremendous value for LINN Energy, LinnCo and Berry equityholders. We are pleased to have been able to achieve such a mutually beneficial outcome. Berry's assets are an excellent fit for LINN, and we believe this transaction generates significant accretion to our distributable cash flow per unit."

LinnCo's offer of $46.2375 per share values the equity of Berry at approximately $2.5 billion and assumes the $1.8 billion in debt outstanding.

Berry Petroleum generated annual revenue of $920 million for its full year of 2011. The company reported a full-year loss of $228 million for that year on the back of $645 million in one-time charges. Excluding one-time charges and assuming a normal tax rate, profits would have come in around $200 million. The deal values the company's equity at approximately 2.7 times annual revenue and 12-13 times annual earnings

LinnCo expects significant accretion to the distributable cash flow per unit as a result of the deal, in excess of $0.40 per unit. Consequently the firm proposes to increase the payouts to its unitholders.

The deal is subject to shareholder approval of both Berry and LinnCo as well as unitholders of LINN Energy. The deal is furthermore subject to common closing conditions, including ant-trust approval. The deal is expected to close by June of this year.


LINN ended its fourth quarter of 2012 with $6.0 billion in short- and long-term debt and negligible amounts of cash, for a sizable net debt position. The company generated annual revenue of $1.77 billion on which it net lost $386.6 million as a result of the high debt position as well as an impairment charge of $422.5 million.

LINN's market valuation of $7.5 billion values operating assets at 4.2 times annual revenue, a premium compared with Berry's 2.7 times multiple.

As a result of the significant accretion expected from the deal, LinnCo will increase its quarterly distribution to $0.725 per share for an annual dividend yield of 7.4%. LINN Energy boosted its quarterly payout to $0.77 per share, for a yield of 8.2%.

Some Historical Perspective

Shares of LinnCo have traded in a tight $35-$40 trading range since its public offering in October of 2012. Similar price ranges apply for LINN Energy, which went public at the same time. The company is growing rapidly, partially as a result of acquisitions. Total revenue growth has not been that strong over the past year, mainly due to lower natural gas prices.

Over the past year, total production grew to 671 MMcfe/d per day and even reached 800 MMcfe/d on average per day in the final quarter.

Investment Thesis

As a result of the deal with Berry Petroleum Company, LINN will boost its production by roughly 30% to 1,040 MMcfe/d per day, or roughly 175,000 barrels of oil equivalent. LINN values Berry in total at $4.3 billion, or 32% of its current enterprise value. This is fair given the 30% boost in production and 33% increase in proven reserves. More interesting, the reserve base of Berry consists of 75% in oil, which is beneficial given the higher oil prices relative to natural gas prices.

The impact of a relative greater oil production is noticeable in the revenue of Berry. Its revenue of $920 million for 2011 will boost annual revenues of LINN Energy for 2012 by little over 50%. Berry trades at merely 5.6 times 2013's annual EBITDA which compares to a valuation of 8.0 times for LINN Energy itself.

Overall the deal seems very favorable to LINN's shareholders. The firm can increase its exposure to oil at very fair prices. The total reserves exposure to oil will increase by 8 percent points to 54% as a result of the deal. Over the past year the company already acquired natural gas reserves from BP in both Kansas, and Wyoming, for a total of $2.2 billion.

Shareholders could expect more acquisitions from LINN Energy as the company can more easily attract capital due to its legal structure to reduce the tax burden by passing cash flows directly to unitholders instead of passing by the Internal Revenue Service.

Shares of LINN Energy continue to offer excellent value, especially for dividend investors. Because of its unusual structure, the company does not have to pay corporate income tax allowing LINN to pay out higher dividends compared with competitors. An 8.2% dividend yield offers excellent value for yield hunters at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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