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Stop Trying to Read the Tea Leaves on the Linn Energy and Berry Petroleum Merger

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On Wednesday, Berry Petroleum (UNKNOWN: BRY.DL2  ) delivered a solid earnings report, with oil production clocking in at 32,997 BOE/D (barrels of oil equivalent/per day), which is a 20% increase from the same measure in Q3 2012.  The company also raised its 2013 average production forecast from 38,000-40,000 BOE/D to 40,500-40,800 BOE/D as it continues to expand its operations in California. The good news helped push shares up about 5% from closing bell on Tuesday to closing bell on Friday.  

Since Berry has a merger planned with Linn Energy (NASDAQOTH: LINEQ  ) , these earnings should have meant good news for shares of Linn as well, right? Not quite. In fact, as of Friday's close, Linn shed about 7% of value from its Tuesday highs. So what happened?

Berry Petroleum SEC form 10-Q, Part II, Item 1A

The LinnCo merger will not be completed on or prior to October 31, 2013 (the End Date). After the End Date, any of the Company, Linn, or LinnCo may unilaterally terminate the merger agreement at any time prior to completion of the merger. The closing will not occur on or prior to the End Date, and any of the Company, Linn, or LinnCo may unilaterally terminate the Merger Agreement after the End Date. There can be no assurances as to whether the parties will agree to extend the End Date or that the parties will refrain from exercising their rights to terminate the Merger Agreement.

Investors were spooked that this simple disclosure was Berry's way of hinting that they were going to terminate the merger agreement. It shouldn't have come as a surprise to anyone though, as this "deadline" date has been in place since the deal was first agreed upon. It would've been included in the 10-Q regardless of the status or condition of the deal.  

*Insert lawyer joke here*
Have you ever come across a stock profile online and seen the 'headlines' section filled with notices of different law firms pursuing class action lawsuits against a company due to investor losses? You certainly have if you follow Linn Energy and/or Berry Petroleum. These two companies are no strangers to these (usually frivolous) attempts by predatory lawyers whose goal is generally just to annoy a company enough to receive a settlement. SEC filings are the primary way for a company to protect itself in the face of an increasingly litigative business environment.

What does Google have to do with Berry?
A relevant comparative example would be the most recent 10-Q filing by Google.  If you take a look at the 'Risk Factor' section, it almost seems like the company is trying to talk you out of investing in it! A brief highlight:

We face intense competition...we may not remain competitive...we have many competitors in different industries...Our ongoing investment in new businesses and new products, services, and technologies is inherently risky, and could disrupt our ongoing businesses.

It's quite literally the company giving itself the chance to say "I told you so" if the worst-case scenario comes to fruition. Berry Petroleum, just like Google and every other company, has to cover all the bases to protect itself. It doesn't necessarily give any insight into the progress of the merger itself.

Will the deal get done?
I hate to break it to you, but I don't have a crystal ball. But, in my opinion, I still believe that the merger completion is likely. Here are two reasons:

1) Leon Cooperman

Leon Cooperman, head of Omega Advisors (one of Linn Energy's largest shareholders), offered his insight this summer after having what he called "positive conversations" with Berry management. This was during the fever pitch of confusion and uncertainty regarding the SEC inquiry into the deal, and Berry still reiterated that they were committed to the deal.  

2) Distribution

The agreed-upon terms of the merger were 1.25 shares of LinnCo, LLC (UNKNOWN: LNCO.DL  ) for 1 share of Berry. Many have pointed to share price weakness in LinnCo as a reason that the merger could stall. However, I believe that focusing on share price is looking at it with a short-term mindset. 

Berry Petroleum rewards its shareholders with a $0.32 annual distribution, paid quarterly. That is 0.66%. LinnCo pays a monthly distribution that equates to a 10.4% yield. A Berry shareholder would be trading $0.32 per year/per share for $3.85 per year/per share.

Final thoughts
Berry's 10-Q doesn't offer any real insight into the merger. The weakness in Linn Energy and LinnCo after the 10-Q was released is the result of somewhat-misleading headlines and short-term "noise trading," and may present a buying opportunity if it fits with your long-term investing goals. I now close with a relevant Fisher Black quote:

"Perhaps they think the noise they are trading on is information. Or perhaps they just like to trade."

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2013, at 10:29 AM, fearandgreed2005 wrote:

    I like the way the title recommends that one "stop reading the tea leaves" and then you go on to read the tea leaves. At any rate I am long LINCO and I hope you are right.

  • Report this Comment On October 29, 2013, at 10:35 AM, zorro6204 wrote:

    "The closing will not occur on or prior to October 31, 2013 (the End Date), and any of the Company, Linn, or LinnCo may unilaterally terminate the Merger Agreement after the End Date. There can be no assurances as to whether the parties will agree to extend the End Date or that the parties will refrain from exercising their rights to terminate the Merger Agreement."

    - Berry 10Q, note 11

    I'm afraid that tea leaf must be read, because it says that the parties have to "agree" to extend the End Date, whereas the agreement seems to say either party can extend, unilaterally.

    That language used by Berry, and the lack of a call by Linn, can be read as indicating there is a dispute going on, Berry wants out after October 31, Line thinks they can extend without Berry's agreement. Line's counsel advised them not to say anything while the argument is going on, thus no call.

    That's just speculation of course, but otherwise you would have to think Berry's chose of words in the 10Q was an oversight. Doubtful.

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