Major Move for Linn Energy LLC (LINE) in the Energy Arena: Berry Petroleum Company (BRY)

Long-Term Outlook, Prospects and Competition

The major headline that has emerged from this deal concerns its projected ability to increase the size of Linn’s proven reserves by up to 30%. This will undoubtedly provide Linn with the heft that it needs to compete with other U.S.-based independent oil and gas producers.

Although investors who find companies like Linn attractive also tend to invest in midstream players like Energy Transfer Partners LP (NYSE:ETP) and Martin Midstream Partners L.P. (NASDAQ:MMLP), Linn also competes with structured trusts like Hugoton Royalty Trust (NYSE:HGT) and Permian Basin Royalty Trust (NYSE:PBT). All of these organizations are structured to capitalize on free-flowing North American shale oil and natural gas. With its proposed dividend increase, Linn could soon yield more than 8% and compete on equal footing with the most attractive trusts and cash-returning independents on the market. Hugoton yields about 10% and Permian yields 3.4%.  Both of these trusts have PE ratios in the low teens.  Indeed, Linn’s market-beating yield offers a compelling investment rationale on its own.

Berry Petroleum Company (NYSE:BRY)’s current holdings will add to the company’s future prospects. Aside from the Bakken play and the Alberta oil sands, the most exciting North American energy prospect probably lies in the Monterrey Shale of California’s Central Valley. While the area has long produced its share of conventional oil and gas, its potential reserves could exceed those of the Bakken by a factor of three. Long-term investors would do well to watch energy-related developments in this part of North America.

In sum, the proposed merger between Linn Energy LLC (NASDAQ:LINE) and Berry Petroleum Company (NYSE:BRY) holds out the promise of a small arbitrage premium as well as an attractive ongoing yield. Should the combined company’s Monterrey Shale holdings begin to bear fruit, it might prove to be a very rewarding investment.

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