Linn Energy buying Berry Petroleum in $2.5 billion deal

Houston-based Linn Energy agreed to buy Denver’s Berry Petroleum in a $2.5 billion deal that will grow Linn’s proved reserves 34 percent, the companies said Thursday.

In the all-stock deal, Linn will expand its presence in the Permian Basin, East Texas, California and the Rockies as well as pick up a new core area in the Uinta Basin. Berry’s reserves are about 75 percent oil.

The deal adds another large source of potential cash to Linn Energy’s growing portfolio, incorporating holdings in fields that are expected to provide a steady stream of revenues, Linn CEO Mark Ellis said during a conference call with analysts.

“Berry’s high-margin, low-decline asset base is an excellent strategic fit to our current portfolio,” Ellis said.

Linn’s latest growth announcement left analysts giddy over the company’s seemingly contrarian approach as an oil and gas company.

Linn functions as a master limited partnership, which allows it to avoid paying corporate taxes, instead passing on those liabilities to the holders of its units. The structure also limits the company’s ability to hold cash for large investments in new oil and gas exploration, which is how most large producers operate.

Instead, Linn distributes its cash to its owners on a regular basis. That makes sources of consistent revenue, even aging wells with low rates of declining production, a more exciting prospect than it would be to other exploration and production companies, said Kevin Smith, an analyst for Raymond James.

“I think there’s more of a focus on returning capital back to shareholders on a quarterly basis and clearly there’s been a positive investor sentiment on Linn’s approach,” Smith said.

Linn had previously fueled its growth by buying assets from other companies, but announced its first purchase of an entire corporation on Thursday. Other similar acquisitions could happen in the future, Linn Chief Financial Officer Kolja Rockov said.

Linn also reported its 2012 earnings on Thursday, including a net loss of $387 million because of losses related to hedges, write downs and other expenses.

But Linn said it was able to grow its daily production rate by 82 percent during the year, to 671 million cubic feet of natural gas equivalent per day, largely because of acquisitions.

Linn’s proved reserves, a measure of the amount of hydrocarbon resources that can be extracted from leaseholds with existing facilities, infrastructure under construction, or minimal new investment, jumped 42 percent in 2012, to 4.8 trillion cubic feet of natural gas equivalent. The company’s own drilling efforts added 15 percent to its proved reserves total.

The deal, which is expected to close June 30, will give Linn new holdings in long-established fields where production may be on the decline, but where existing wells provide steady returns, Smith said.

Linn is also planning to grow its own production and will drill or participate in the drilling of about 500 new wells in 2013, CEO Mark Ellis said. But those efforts will take place in established basins, where there is a strong certainty of adding to its long-term production, according to the company’s 2013 outlook.

Traditionally, oil companies have focused on growing production through new discoveries, which can result in much higher initial oil and gas output, along with more financial rewards, Smith said. But it also carries more risk, he added. Linn and other companies like it have given investors a different type of energy investment, he said.

“One is more focused on maintaining the current production and the other one is out there just wanting to do more exploratory wells by nature,” Smith said.

Linn will also assume about $1.7 billion in debt. The companies valued the deal at $4.3 billion.