What’s the Deal With LINN Energy LLC (LINE)’s Acquisition of Berry Petroleum Company (BRY)?

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The Best Stock to Profit from Cheap Natural GasWhile analysts and investors have been debating the merits of LINN Energy LLC (NASDAQ:LINE)‘s hedging program, the company’s management team was quietly putting together its largest and most creative acquisition to date. In addition to announcing its fourth-quarter and full-year earnings, LINN, by way of affiliate LinnCo LLC (NASDAQ:LNCO) , announced that it was acquiring Berry Petroleum Company (NYSE:BRY) in a $4.3 billion deal. Let’s drill down and see what this deal means for investors.

The deal structure
This is the first time that an upstream LLC or MLP has ever acquired a C-Corp, so you’ll notice that the deal’s structure is very unique in its nature. Typically, LINN will purchase mature oil and gas assets from an exploration and production company for cash. This time it’s LinnCo doing the buying, and its using its shares as the currency in this all-stock transaction.

The deal, which is structured as a tax-free deal for Berry investors will come in two stages. First, LinnCo will exchange its shares for shares of Berry and assume its debt. From there, LINN will acquire the operating assets of Berry from LinnCo in exchange for units of LINN. Those operating assets will provide a huge boost to the company’s most important metrics.

How it affects LINN’s operations
The acquired assets significantly boost LINN’s operations across the board. LINN’s acquiring around 3,200 long-life, low-decline producing wells on more than 200,000 net acres. Those acres are located in LINN’s core geographies of California, the Permian Basin, East Texas, and the Rockies, as well as adding a new core area to the fold in the Uinta Basin.

The assets will add 240 million cubic feet equivalent per day of production, boosting LINN’s current production by 30%. More importantly, in today’s low-price environment for natural gas, these assets shift LINN’s proved reserves firmly onto the liquids side of the equation. Berry’s reserves, which are 75% oil, now shift LINN’s reserve mix to 54% oil and liquids, which is up from 46% before the deal. Total reserves are boosted by 1.65 trillion cubic feet equivalent, or 34%, with additional probable and possible reserves of 3.8 trillion cubic feet equivalent in future upside potential. When you add it all up, the acquired assets add significantly to LINN’s operations which also have a positive affect on its financial metrics as well.

How it affects LINN’s finances
Because this is an all-stock deal, LINN’s financial metrics, especially on the debt side will be greatly improved. LINN expects that the deal will trigger the change of control provisions on Berry’s senior notes, which LINN then will repay using its credit facility or refinance at a lower rate. The company expects the rating agencies to view the deal as a credit positive.

The company’s financials are further strengthened by the underlying cash flow of the acquired assets. They are highly accretive which improves LINN’s distribution coverage ratio. With this being a key metric for MLP-type investments, its improvement is a big win for LINN investors.

How it affects LINN’s distribution
The transaction is so accretive to distributable cash flow that it will boost it by $0.40 a unit. This has given management the confidence to recommend a distribution increase once the deal closes. LINN Energy investors will see their payout rise 6.2% from $0.725 a unit to $0.77 after the deal closes. LinnCo investors will fare even better as the company now estimates it won’t have any additional tax liability this year. Therefore, LinnCo investors will see an 8.5% pay raise to that same $0.77 rate.

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