While Berry focused initially on the Wasatch, more recently it’s been drilling and commingling these same Green River formation shales with the deeper Wasatch. With only 2 rigs running, production is actually down from the fourth quarter of 2012. The merger affords an opportunity to throw more capital into the basin and realize its growth potential.
Berry’s newest liquids-rich assets are Permian. LINN already has a lot of acreage in the basin, and recently acquired more in a separate transaction. The combined company would have an expansive 160 MMBOE (million barrels of oil equivalent) of Permian reserves.
There’s a lot of rig activity taxing infrastructure. Both Berry and LINN are feeling that pinch. New prospects in shale make it a playground for some of the big operators. Apache Corporation (NYSE:APA), the leader in basin activity has over 30 rigs running and its production was up 18 % year over year. Apache Corporation (NYSE:APA)’s focus is unlikely to change given its massive Permian resource potential.
Infrastructure improvements will eventually catch up to the needs of this bustling basin. In the meantime, the large combined footprint provides the opportunity to patiently pick and choose the most ideal opportunities.
It’s also noteworthy that LINN has substantial organic growth potential of its own. Altogether, there are 250 MMBOE of proven, undeveloped reserves waiting behind LINN’s drill bit. The combined entity would have substantial organic growth potential.
LinnCo’s high yield offers a predictable, solid return that’s sure to grow.
Post-merger, LINN’s distribution will increase and its coverage issues disappear. Berry is expected to add 40 cents of DCF for LINN and the recent Permian purchase should add even more. It’s difficult to envision a scenario where share weakness persists given resolution of the merger impasse and its hard to beat 10% yield. Berry’s earnings yield is currently 6% and it provides only a token dividend. The distribution’s a big cash-in-hand boost for Berry shareholders.
It’s also important to consider that this isn’t a cash deal. This deal’s for stock, so current Berry holders participate in the future upside. Ultimately, access to capital at Linn Energy LLC (NASDAQ:LINE)’s cost makes Berry Petroleum Company (NYSE:BRY) better. Its assets become more profitable and its drilling program could accelerate. Berry shareholders benefit from this merger, because LINN’s the key that can unlock Berry’s potential.
The article Three Good Reasons to Vote Yes On This Merger originally appeared on Fool.com and is written by Peter Horn.
Peter Horn owns LINE units. The Motley Fool has no position in any of the stocks mentioned.
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