The big deal
Last quarter Linn Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO) stunned the investment world by announcing a $4.3 billion deal to acquire Berry Petroleum Company (NYSE:BRY). The all-stock deal is expected to close at the end of the second quarter. With a deal as large as this one, it’s important to watch to make sure everything is still on track.
In one sense, the Berry Petroleum Company (NYSE:BRY) transaction is a transformational deal for LINN. It shifts the reserve mix from 46% oil and liquids to 54%, as Berry’s reserves are 75% liquids. Even more important is that those reserves are very oil-focused; three-quarters of the reserves are actually oil. However, while the deal is its largest, and more complex than a typical deal, it’s really just business as usual for the highly acquisitive LINN.
Hedging update
Because of the short seller comments about its hedging practices, LINN has decided not to purchase any puts this year. That begs the question: How does Linn Energy LLC (NASDAQ:LINE) plan to hedge that portion of its production going forward? It could use swaps exclusively, or it could take a page out of Berry Petroleum’s book and begin to use three-way hedges.
Among its peers in the MLP and LLC space, LINN by far hedges the most production. BreitBurn Energy Partners L.P. (NASDAQ:BBEP), for example, has hedged roughly 75% of its production through 2015, whereas LINN is 100% hedged through 2016. BreitBurn almost exclusively uses swaps as its hedge of choice. It’s a similar story at Vanguard Natural Resources, LLC (NYSE:VNR), which also uses swaps to almost exclusively hedge natural gas while using three-way collars to hedge about a third of its oil production. While LINN could get more creative, one thing I’d be surprised to hear is that it’s going to join these two peers and leave some of its production unhedged.
