Some Good News for LINN Energy Investors

Photo credit: LINN Energy

Sometimes no news is good news and that's exactly what LINN Energy (NASDAQOTH: LINEQ  ) investors got when its acquisition target, Berry Petroleum (UNKNOWN: BRY.DL2  ) , reported earnings on Aug. 7. Berry only referred to the fact that the merger is currently being delayed by the SEC inquiry, meaning LINN investors can rest easier knowing that its deal won't be called off when LINN reports earnings tomorrow. With that as context, let's take a closer look at what Berry had to say about its operations, which are what LINN has been trying to acquire all year.

Drilling down into the numbers
Berry was able to report net earnings of $61 million, or $1.10 per share. However, after adjusting out items such as derivatives and transaction costs, its adjusted earnings were $41 million, or $0.73 per share. That was slightly below the $0.76 per share that analysts were expecting, but a solid result nonetheless.

For investors of LINN Energy and its affiliate LinnCo (UNKNOWN: LNCO.DL  ) , which LINN is using to acquire Berry, the real numbers that matter are Berry's production results on the quarter. Here Berry reported very solid numbers as it averaged 39,529 barrels of oil equivalent per day, or boe/d, which was up 12% over last year. More importantly, its production mix has shifted from 74% to 80% oil over the past year. Because oil is so much more valuable than natural gas these days, this is exactly the type of shift investors will want to see as it means Berry is focusing its capital on its highest-return projects. 

In fact, Berry has been investing only to grow its oil production; it is actually allowing its natural gas production to naturally decline. Overall, its natural gas production has declined 11% year over year from 9,045 boe/d to 8,073 boe/d. Meanwhile, its oil production is up 20% year over year as the company has really focused it capital on its high-margin oil projects, which is what caught LINN's eye in the first place.

Production highlights
The highlight on the quarter was Berry's Diatomite properties in California, which delivered 15% production growth from just last quarter. The company added 47 new completions in the field last quarter which helped to drive those results. Elsewhere in California, the company grew production at its New Steam Floods asset by 12% quarter over quarter. The bottom line is that Berry continues to focus on expanding development in its oil-rich California assets in order to offset its natural gas production declines, while still growing its overall production.

The other important Berry asset that LINN investors need to watch closely is in the Uinta Basin, which would be a new operating area for LINN. Berry's production there was basically flat over the first quarter, despite drilling 22 wells. The company was hampered by delayed completion activity due to the of lack of takeaway capacity. Berry has shifted to transporting crude oil out via rail and now has 100 rail cars operating to get its oil to markets outside of Utah. That has now resolved the situation, meaning Berry's production here can  really start to deliver increased margins and cash flow.

Final Foolish thoughts
Berry's operations still look solid as the company continues to deliver despite the issues with closing its merger with LINN and LinnCo. For the year Berry expects to deliver total production growth of 5%-10%, with oil being the key driver as the company plans to boost its oil output by 10%-15%. With oil prices remaining well over $100, this is exactly what investors want to see and why LINN is trying to get the deal done despite the efforts of short-sellers to stop the transaction.

However, until the situation with the SEC is cleared up and the Berry transaction closes, there is a bit more risk to owners of LINN's units. That's why, if you are on the lookout for some currently intriguing energy plays to balance out this risk you should check out The Motley Fool's report "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.

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  • Report this Comment On August 08, 2013, at 9:45 AM, road2perdition wrote:

    The Berry deal cannot go through. The deal is 1.25 LinnCo shares for each Berry share. They trade at $28 and $39. That would be like me paying you $35 for $39. Why would Berry shareholders sell for less than they can get on the open market. These deals always require a premium to the market value of 20% to 40%. It would take 1.7 shares of LinnCo shares to reach the level of a 20% premium for Berry shares. Isn't it time to quit talking about the Linn-Berry deal?

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