LINN Energy's (NASDAQ: LINE ) transformational deal with the help of affiliate LinnCo (NASDAQ: LNCO ) to acquire Berry Petroleum (NYSE: BRY ) is currently being held up by the SEC. While the delay has investors nervous, it could very well be worth the wait for more than just the immediate addition of oil rich cash flows. That's because Berry has a hidden asset tucked away that could become a nice little gem for LINN in the future.
As of the end of last year Berry held just over 6,700 net acres in California. One of the main reasons why LINN wants to buy Berry is because of the current production of its California assets. However, the fact that most of these acres overlay the prospective Monterey Shale could make the deal all that more valuable to LINN in the future if it's successfully able to bring Berry into the fold. That means California could really turn out to be quite the hidden gem for LINN Energy investors.
While it's true Berry's portion of the Monterey is tiny – the entire play runs over 1,752 square miles – the sheer amount of oil in place makes it a potentially huge resource. For example, according to Energy Information Agency estimates, each well in the Monterey could ultimately produce 550,000 barrels of oil. Given the 16 wells per square mile spacing that the EIA used for its analysis, it suggests that Berry could drill around 160 wells on its acreage as it has about ten square miles of leased land. While that might not sound like a lot of wells, it does represent the potential for 88.0 million barrels of oil, which would be a nice addition to Berry's current California proved reserves which are 127 million barrels of oil equivalent.
That being said, given the high costs of developing shale oil, LINN is likely to sell a stake in the asset rather than ever develop it. LINN has shown in the past that it would rather someone else prove up a shale play before it gets involved. For example, back in 2008 LINN sold its entire Appalachian position, including the Marcellus shale to XTO Energy which is now a subsidiary of ExxonMobil (NYSE: XOM ) . LINN received $600 million for the asset, which would have required too much capital to fully develop. Meanwhile, XTO was able to get a nice toe-hold into what was then an emerging shale position. While LINN wouldn't sell its California acreage, it probably would enter into a joint venture in order to get it developed.
So, while the future development of the Monterey probably won't be a major needle mover for LINN Energy, it still does represent another reason why the Berry transaction is important to its future. The deal adds a lot of high margin oil production, as well as tremendous oil reserves. That's why despite the delays, this is one deal that should really prove to be worth the wait.
The Monterey could be America's next great shale play. However, you don't need to wait around for it to be developed to make money from the record oil and natural gas production that is revolutionizing the United States' energy position.That is because the Motley Fool is offering you a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.