LINN Energy and LinnCo to Acquire Berry Petroleum Company for $4.3 Billion

LINN Energy, LLC (Nasdaq:LINE), LinnCo, LLC (Nasdaq:LNCO) and Berry Petroleum Company (NYSE:BRY) today announced the signing of a definitive merger agreement pursuant to which LINN and LinnCo will acquire all of Berry’s outstanding shares for total consideration of $4.3 billion, including the assumption of debt. The transaction, which is structured as a stock-for-stock merger of Berry with LinnCo followed by the acquisition of the Berry assets by LINN, is expected to be tax-free to Berry shareholders. This transaction represents the first ever acquisition of a public C-Corp by an upstream LLC or MLP.

Operational Highlights

• Berry’s long-life, low-decline, mature assets are an excellent fit for an MLP/LLC;
• Meaningful growth to LINN’s portfolio with increased geographic presence in California, the Permian Basin, East Texas, and the Rockies, as well as the addition of an attractive new core area in the Uinta Basin;
• Production of approximately 240 MMcfe/d, increasing LINN’s current production by 30 percent;
• Berry’s reserves are approximately 75 percent oil, which results in a meaningful increase in liquids exposure to 54 percent from 46 percent of proved reserves, pro forma as of December 31, 2012;
• Proved reserves of approximately 1.65 Tcfe, increasing LINN’s estimated proved reserves by 34 percent;
• LINN has identified additional probable and possible reserves at Berry of approximately 3.8 Tcfe;
• Approximately 3,200 producing wells and more than 200,000 net acres; and
• Potential for production optimization and cost savings.

Financial Highlights

• The transaction is expected to be highly accretive to distributable cash flow per unit. In the first full year following closing, accretion is expected to be in excess of $0.40 per unit.
• LINN plans to recommend to its board of directors an increase in the current quarterly distribution of 6.2 percent. LINN’s current quarterly distribution of $0.725 per unit, or $2.90 per year, would increase to $0.77 per unit, or $3.08 per year. The recommended increase is anticipated to take effect in the quarter immediately following the closing of the transaction, which is estimated to occur on or before June 30, 2013.
• LinnCo’s current estimated annual dividend of $2.84 per share includes a reduction of $0.06 per share for taxes, which LinnCo now estimates to be zero for 2013. Therefore, management estimates that the LinnCo dividend per share for the quarter ended March 31, 2013 will increase 2 percent from $0.71 to $0.725 per quarter, or $2.90 per share on an annual basis.
• LinnCo’s management intends to recommend to its board an increase in LinnCo’s dividend by 8.5 percent following the closing of the transaction to $3.08 per share on an annualized basis, which includes the $0.18 per share increase in LINN distributions.
• Due to the significant accretion expected from this transaction, LINN’s coverage ratio for the second half of 2013, assuming the transaction closes on or before June 30, 2013, is expected to be approximately 1.20x including the anticipated distribution and dividend increases.
• All stock consideration and greatly increased size are expected to result in significantly improved debt metrics.
• As part of the transaction, Berry will be converted into a limited liability company and then it will be contributed to LINN in exchange for LINN units. This arrangement allows LINN to own Berry’s assets in a pass-through entity without any immediate payment of tax.

“This transaction creates tremendous value for LINN Energy, LinnCo and Berry equityholders. We are pleased to have been able to achieve such a mutually beneficial outcome,” said Mark E. Ellis, Chairman, President and Chief Executive Officer, LINN Energy. “Berry’s assets are an excellent fit for LINN, and we believe this transaction generates significant accretion to our distributable cash flow per unit.”

“We have great respect for what the Berry management team has accomplished and consider the Berry employees to be an important part of this transaction,” added Ellis. “We welcome them to LINN and believe that together, we will be positioned for great success in the future.”

Robert Heinemann, President and Chief Executive Officer, Berry Petroleum Company, said, “Today’s merger announcement with LINN Energy marks the beginning of a new, important chapter in our company’s history. Berry and LINN have demonstrated the ability to prudently grow their businesses while delivering value and returns to their respective shareholders and unitholders. Berry’s portfolio fits well with LINN’s structure and asset base, and the combination of the two companies will create one of the largest independent E&P companies in North America. This transaction consideration delivers substantial value to Berry shareholders with the opportunity to participate in the upside potential of the combined, growing company.”

Transaction Terms & Structure

Under the terms of the agreement, which was unanimously approved by the boards of directors of LINN Energy, LinnCo and Berry, LinnCo has agreed to issue 1.25 common shares for each common share of Berry outstanding prior to the merger. The consideration to be received by Berry shareholders is valued at $46.2375 per Berry share based on LinnCo’s closing price as of February 20, 2013.  This represents a premium of 19.8 percent to the Berry closing price on February 20, 2013, and a premium of 23.1 percent to its one month average price at that date.

The acquisition, which is expected to be tax-free to Berry’s shareholders, is structured as a stock-for-stock merger. In connection with the merger Berry will be converted into an LLC. Upon completion of the merger, LinnCo will contribute the Berry assets to LINN in exchange for LINN units.

In connection with approval of the contribution from LinnCo to LINN Energy, the boards of directors of each company formed a conflicts committee to evaluate any potential conflicts that may arise between LINN and LinnCo. To ensure the independence of each of the conflicts committees, two directors resigned from the LinnCo board of directors to serve on the LINN conflicts committee and two directors resigned from the LINN board of directors to serve on LinnCo’s conflicts committee. In addition, in connection with the transaction, one representative of the board of directors of Berry will be appointed to the board of either LINN or LinnCo.

The transaction is subject to the approval of the shareholders of Berry and LinnCo and the unitholders of LINN Energy, as well as customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction is expected to close by June 30, 2013. The combined company will be headquartered in Houston, Texas.

2013 Estimated Cash Distributions (Subject to Board Approval)

LinnCo Estimated Taxes

In order to avoid immediate tax on LINN’s acquisition of the Berry assets, LinnCo incurred a deferred tax liability. Because of the incremental costs for LinnCo resulting from this deferred tax liability, LINN has agreed to pay LinnCo $6 million per year for three years (2013, 2014 and 2015) or roughly $0.06 per LinnCo share. Due to the significant estimated shield provided by LINN to LinnCo, LinnCo’s cash tax liability is estimated to be zero for the last two quarters of 2013. In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo’s tax liability will be in the range of 2 percent — 5 percent of dividends paid, which is the same as the estimates provided in the prospectus for the LinnCo IPO. Therefore, this transaction is not estimated to give rise to any additional tax liability for LinnCo over and above the guidance that was previously provided. LINN’s management and board have also agreed to evaluate the need for any additional payments from LINN Energy to LinnCo should taxes be higher than expected.

Senior Notes

LINN expects that the completion of this transaction will trigger change of control provisions in the indentures governing Berry’s existing senior notes. These change of control provisions entitle holders of the notes to receive 101 percent of par for the notes plus accrued and unpaid interest from a change of control offer related to each series of notes. LINN expects any of Berry’s notes not tendered pursuant to the change of control offers to remain outstanding following the transaction, subject to any opportunistic refinancing of such notes it may pursue in the future based on market conditions.

Advisors

Citigroup Global Market Inc. acted as exclusive financial advisor to LinnCo, and provided a fairness opinion to the LinnCo board of directors; Latham & Watkins LLP acted as legal advisor to LINN Energy and LinnCo. Greenhill & Co., LLC provided a fairness opinion to the conflicts committee of the LINN Energy board of directors; Akin Gump Strauss Hauer & Feld LLP acted as legal advisor to the conflicts committee of the LINN Energy board of directors. Evercore Partners provided a fairness opinion to the conflicts committee of the LinnCo board of directors; Locke Lord LLP acted as legal advisor to the conflicts committee of the LinnCo board of directors. Credit Suisse Securities (USA) LLC acted as exclusive financial advisor to Berry Petroleum Company and provided a fairness opinion to the Berry Petroleum Company board of directors. Wachtell, Lipton, Rosen & Katz acted as legal advisor to Berry Petroleum Company.

Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Berry and LINN Co following the announcement.  OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.

Howard Weil (2.21.13)

Quick Take: LINE made a big splash in the M&A market, executing its first corporate deal by buying BRY for $4.3 billion. We like the price for LINE and estimate the deal to be ~$0.40/unit accretive after dilution (1.25 shares of LNCO for 1 share of BRY). Further, LINE is increasing its distribution ~6% post-deal. While the quarterly print included liquids production ~7% below our estimate, the headline grabber should be the deal, and we think BRY’s assets will be a good fit for LINE. With the increase to the distribution, we are increasing our price target for both LINE and LNCO to $39.

Deal Details: LINE is paying ~$4.3 billion for BRY, which equates to $46.24/share. Using our 2013 EBITDA estimate of $640MM for BRY, the deal is outwardly 6.7x EBITDA. We estimate that LINE will have ~304MM units outstanding post the deal, and after the dilution, the transaction looks to be ~$0.40/unit accretive, which helps bring LINE’s coverage ratio higher. The Company will pay out $0.18 more per unit once the deal is closed. Our biggest takeaway is the value of LNCO as currency, and while this merger may take time to integrate, we would not be surprised to see LINE right back at it post-integration.

Operational Update: The most notable data point for us was the Company’s first horizontal Hogshooter well on the Oklahoma, which came online at 5,406 Boepd (2,055 Bopd and 1,915 Bnglspd). If LINE can repeat this success, it could open up more growth inventory for the Company. Further, with the BRY acquisition, LINE now has significant acreage in the heart of the Midland Basin that may be prospective for horizontal Wolfcamp drilling, which we would not be surprised to see marketed if valuations continue to climb.

Results: LINE’s production came in lower than we were expecting with liquids production off our estimates by ~7%. Costs looked good although DCF of $0.78/unit came in low vs. the consensus estimate of $0.91/unit (our estimate of $0.64/unit includes an adjustment for hedge premiums and was inline at $0.78/unit on an apples-to-apples basis).

SunTrust Robinson Humphrey (2.21.13)

BRY – Cashing Out at ~$46/Share; Congratulations BRY Holders

BRY to be acquired near $46/share. Berry Petroleum (BRY, $38.59, Buy), LINN Energy (LINE, $36.65, Not Rated) and LinnCo, LLC (LNCO, $36.99, Not Rated) announced the signing of a definitive merger agreement, pursuant to which LINN and LinnCo will acquire all of Berry’s outstanding shares for a total consideration of $4.3 billion, including the assumption of debt. The transaction is structured as a stock-for-stock merger of Berry with LinnCo followed by the acquisition of the Berry assets by LINN. BRY holders will receive 1.25 common shares of LNCO, which equates to $46.2375 as of last night’s close.

The purchase price represents a 19.8% premium to BRY’s last closing price and a 23.1% premium to its one-month average price. Although the transaction is subject to the typical regulatory approvals, we do not anticipate major hurdles to the deal as it has been approved by the boards of all three companies. The transaction is expected to close by June 30, 2013.

Who’s next? LINN notes that this is the first-ever acquisition of a public C-corp by an upstream LLC or MLP. Although a bit complicated – Berry will be converted into an LLC at some point – the transaction is expected to be tax-free to BRY holders. This will no doubt spur speculation as to what company could be next. Denbury Resources (DNR, $18.04, Buy) is an obvious candidate, in our view, given the long-lived nature of its tertiary oil reserves. Resolute Energy (REN, $9.53, Neutral) may also be mentioned, but given the company’s aggressive push into the Permian Basin, we see this combination as less likely. Finally, a unique non-operated model like Northern Oil & Gas (NOG, $14.00, Buy) may make more sense in an MLP structure.

Wells Fargo Securities (2.21.13)

Summary:  Berry (BRY) to be acquired by LINN Energy for $4.3 billion, including assumption of debt.  All-stock transaction with each BRY shareholder getting 1.25 common shares of LinnCo – transaction expected to be tax free to Berry shareholders.  Transaction values BRY at $46.24/share, or a 20% premium to last night’s close. Following the of creation of LinnCo, there had been significant speculation as to who/what LinnCo would buy – BRY, along with NFX, FST, and KOG had all been names that had been speculated, although based on our client conversations, Street would have put BRY as least likely of those four.

Deal Metrics:  On a flowing daily barrel of production, LinnCo paying $109K/day (based on our 4QE).  On a reserve basis, LinnCo paying $15.64/boe on proven reserves (using 1.65 Tcfe of proven reserves in LinnCo press release –that is BRY’s 2011YE reserve number–so not sure if BRY did not grow reserves in 2012 or LinnCo using 2011 number). For what it’s worth, our NAV est on BRY is $50/share.  Per our estimates, LINN paying 6.0x 2013E EBITDA and 5.6x 2014E.

Who Else?  Will likely result in short covering as well as a bid to other oil weighted or even underperforming stocks.  Mid-cap and small cap stocks that will get the most attention this morning, in our view, would be, in no particular order, WLL, KOG, AREX, and OAS.  On the next tier, we would put CXO, PXD, FANG, ROSE, and FST.  Finally, RRC and COG (although both natural gas weighted), always get a bid when M&A news hits.  Of note, according to LINN, the deal represents the first ever acquisition of a public C-corp by an upstream MLP or LLC.  Also, along with PXP/MMR, it marks the third corporate takeout in the last few months.  We view LinnCo transaction as unique given their structure and don’t expect other MLP purchases of C-corps.  We think MLP model will remain buying production tails and long-lived, low capital intensity asset.  Please see our note dated 10/8, “Stars Aligned For Additional M&A Activity,” for more color on our E&P M&A views.

Any Other Buyers?  From a buyout perspective, the most likely suitors we had always heard for BRY were Plains (PXP-$45.55, Not Covered) and Occidental Petroleum (OXY- covered by Roger Read). PXP obviously out and while OXY had expressed interest in the past, we don’t envision OXY getting involved.  Also of note, the Berry Family still has a meaningful interest in BRY shares.  This transaction is expected to be tax-free, and given the structure of LinnCo, the family can continue to receive tax advantaged distributions.