HOUSTON — Months after Linn Energy’s all-stock deal to buy Denver oil producer Berry Petroleum stalled under shareholder and regulatory pressure, the Houston firm is putting another $600 million on the table.
Linn Energy, the oldest oil-producing master limited partnership, hiked its buyout offer on Monday to $4.9 billion as Berry Petroleum has “consistently outperformed expectations” since talks of an acquisition first began, Linn Energy CEO Mark Ellis said in a written statement. The offer includes the assumption of about $1.7 billion in debt, according to regulatory filings.
The company’s subsidiary LinnCo is now offering investors 1.68 common shares for each share in Berry Petroleum, up from its original 1.25 shares.
Investors had clamored for a higher price ever since the two oil producers inked a deal in February, sending Linn Energy’s stock down 20 percent. The market now views Berry Petroleum’s assets in the Permian Basin in East Texas as worth more than what Linn Energy was paying, as much of the industry’s attention has shifted to the region’s oil-producing Wolfcamp play, said Ethan Bellamy, a senior analyst with Robert W. Baird & Co.
“The market was saying that was not going to fly,” said Ethan Bellamy, a senior analyst with Robert W. Baird & Co. “But with the sweetener today, they’ve acknowledged the market’s position and considerably increased the likelihood of getting the deal done.”
A deal would push Linn Energy’s commodities mix to 54 percent oil on Berry Petroleum’s oil-heavy assets in California, the Permian Basin in West Texas and the Rocky Mountains. Currently, its proved reserves are about 47 percent oil and other liquids.
The Houston firm’s daily production would reach more than 1 billion cubic feet equivalent per day, and its proved reserves would grow to about 6.6 trillion cubic feet of oil and gas.
The deal would merge Berry Petroleum and LinnCo in a stock-for-stock merger, and Linn Energy would then acquire Berry Petroleum’s assets. An approval from shareholders would validate Linn Energy’s use of its subsidiary LinnCo as a vehicle to boost the price it can offer for selling companies and assets, the first time such a buyout strategy has been used in the upstream MLP sector.
Because LinnCo is a C-corporation, it allows the MLP to overcome limits on the size of its acquisition targets and avoid complications in the types of equity it can offer shareholders of other companies.
“Everybody invested in exploration and production should want this deal to work,” Bellamy said. “They could be out hunting more c-corporations, and therefore would be worth more.”
In July, the company disclosed the U.S. Securities and Exchange Commission had launched an informal inquiry into the deal and the company’s cash-flow hedging strategies. Linn Energy’s stock sank another 25 percent before recovering to about $28 per share that month.
The SEC would not comment on the status of the probe Monday, but the company said in a statement last week the SEC had no further comments in its inquiry.
“Linn is not out of the woods yet, but we’re a lot closer to vindication than in recent months,” Bellamy said.
The companies expect to hold a shareholder vote on the deal in mid-December. Linn Energy’s share price rose 2.5 percent to $31.58 in mid-day trading on the Nasdaq stock exchange.