Linn Energy LLC (LINE), Berry Petroleum Company (BRY): Three Good Reasons to Vote Yes On This Merger

Linn Energy LLC (NASDAQ:LINE) units are under pressure amid a short attack, poor natural gas liquids (NGL) pricing and an unofficial SEC inquiry. At the center of the storm is its merger with Berry Petroleum Company (NYSE:BRY). Linn Energy LLC (NASDAQ:LINE) and Berry Petroleum Company (NYSE:BRY) both jumped recently after they finally set the record date for shareholder approval. Ultimately, the deal comes down to whether or not it makes sense for Berry shareholders. Although LinnCo LLC (NASDAQ:LNCO) shares are down, I think the merger still makes sense.

Merger delays battered LINN shares.
This closing’s dragged on for months. Originally scheduled for June 30^th, the final vote is now set for September 30^th. In between, Linn Energy LLC (NASDAQ:LINE) reported two soft quarters and shortfalls on its distributable cash flow (DCF).

Things got really messy when the SEC launched an informal inquiry into LINN’s treatment of its hedge options, seemingly validating the shorts’ thesis. Units plunged 32% in a period of days and the merger’s death watch was on. Shares rallied briefly in June, only to derail again as critically weak NGL pricing torpedoed Linn Energy LLC (NASDAQ:LINE)’s second quarter results. Circumstances seemed to conspire against the merger at every turn.

Is the merger back on track?
Now that the SEC is presumably all squared away, the vote is the last hurdle. That’s a great relief for Linn Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO) holders. LINN’s current problems go from overwhelming to irrelevant after folding Berry Petroleum Company (NYSE:BRY) in. The big question is does it still make sense for Berry shareholders? I think the answer is yes, despite some challenging math.

LINN’s offer of 1.25 shares of LinnCo LLC (NASDAQ:LNCO) had a value of $46.24 on the day of the offer and arbs quickly pumped Berry shares. The offer now stands at $39.29 per Berry share as of Friday, September 13^th. Needless to say, that’s darn unattractive given Berry Petroleum Company (NYSE:BRY)’s near $45 a share. Despite that, there are three good reasons to push the merger through.

LINN’s Deep Pockets
Berry’s not without its short term challenges. There’s $200 million in debt due June of 2014. It can handle the maturity, but its capital is better put to use drilling. LINN can easily handle the maturity and future drilling capex. Its cost of capital is lower and its pockets are much deeper.

Nothing illustrates that better than Linn Energy LLC (NASDAQ:LINE)’s recent acquisition. LINN raised $0.5 billion that included new term loans on top of its $4 billion revolver in the face of all this uncertainty. Even amid the turmoil, the bankers aren’t concerned in the least.

Those deep pockets can unlock Berry’s potential.
Berry Petroleum Company (NYSE:BRY)’s assets are a nice set of bolt-on opportunities with a sprinkling of new growth potential for LINN. Like Berry, LINN cut its teeth in California, and Berry’s Permian assets would add to LINN’s already active Wolfberry drilling program. These are basins LINN Energy understands.

Berry Petroleum Company (NYSE:BRY)’s Uinta basin assets also provide LINN access to a newly rejuvenated liquids-rich play with growth opportunities. Newfield Exploration Co. (NYSE:NFX) proved its potential. The Wasatch sandstone has produced there for decades, but the shallower shales weren’t economical until horizontal fracking made everything work.

Newfield Exploration Co. (NYSE:NFX) tripled Uinta production from 2004 to the present drilling these shallower Green River formation targets. Additional drilling efforts now focus on deeper Uteland Butte and Wasatch objectives.