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Linn Energy, LLC Message Board

  • fredrickson01 fredrickson01 Nov 9, 2013 12:44 PM Flag

    Did Linn Overpay? No...Accretive? Yes

    Lots of opinions flying around on these questions.
    Thought I'd offer a few figures to help with answers.
    As we all know, Linn's original offer to BRY was 1.25 shares of LNCO per BRY share. With BRY having 54.5 million shares outstanding, that worked out to $2.519 billion (not including assumption of BRY's debt), or $46.2375 per BRY share with LNCO priced at $36.99 at the time of the announcement on 2/21/2013. BRY produced $501.44 million of Cash Flow from Operations (CFFO) in 2012, so it worked out that Linn was paying $5.02 per dollar of BRY's CFFO.
    The revised offer is for 1.68 LNCO shares per BRY share. With LNCO recently priced at $31.60, that values BRY at a total of $2.892 billion (not including assumption of BRY's debt), or $53.09 per BRY share. BRY's 2013 CFFO is estimated (by me) to be right around $600 million (with three quarters already reported at $405.31 million and 3-Q at $173.3 million, a $195 million Q-4 gets to $600 million). The new valuation of BRY works out to $4.82 per dollar of BRY CFFO. So it looks to me like Linn is getting a better deal than originally offered if one looks only at price paid per dollar of annual Cash Flow from Operations...paying about 4% less per CFFO dollar.
    Accretion -- Originally, Linn emphasized in the 2/21/2013 release that BRY would be accretive to cash available for distribution in the first year by at least $.40 per share. On the original post-merger share count of 302.3 million, that's at least $121.3 million. Assume the accretion is at least that much with BRY showing improving performance and spread $121.3 million over the new post-merger share count of 326.7 million and you get at least $.37 per share accretion.
    We'll see after the first of the year how Linn pencils it all out, but I'll be surprised if the accretion isn't a bit more that shown in these estimates.
    All in all, I'm looking for a IQ distribution increase up to $3.10-3.20 and LINE/LNCO share prices moving toward $36-38 by 2Q '14.

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    • So what happens if instead of raising the payouts, they start to purchase stock?

      • 1 Reply to chris.trendle
      • Chris,
        The effect of buying back units vs lifting the distribution would be that the accretion would result in a rise in per unit price rather than in an increase in distributions. $121 million in share buybacks at, say, $32 a share would take share count down by about 4 million or a little over 1.2%. So theoretically, unit price of the remaining shares outstanding would rise about 1.2% or about $.37. Net, net...unit holders get about $.37 regardless of which way the accretion is applied. The main difference, other that tax implications, is that the unit buyback could be a one time event whereas the distribution increase would be seen annually (or monthly). As the accretion would affect annual cash flows, buybacks could also be repeated.
        Of course, other than the math stuff, management options and actions are largely speculation.for example, the accretion could be applied to drilling, fracking, more acquisitions, etc. In anc case, the accretion benefits the unitholders in one way or another.
        Best regards.

    • Linn and Lnco are clearly a great value play at current levels.

    • The deal was needed. It's accretive. Berry management extracted their pound of flesh by forcing the ratio to be bumped from 1.25x to 1.68x

      I think it added a lot of other items:

      No more discussion of distribution cut...with the accretion from Berry, coverage should be above 1.0x on a going forward basis.

      It cleans up the terribly bloated balance sheet. Perhaps Linn will begin reporting debt metrics again in their presentations, which were conveniently missing the past year or so as the balance sheet ballooned up on the debt side.

      The real kicker is that Linn now has 325 million units. It will take monster deals to achieve even pedestrian distribution growth (law of large numbers as Buffett likes to so casually mention in most of the Berkshire annual reports). 5% distribution growth will require $47 million in accretive DCF, not counting coverage.

      The one item that remains unmentioned is that oil futures are trending downwards. Already at $95 now, with '14 thru'18 values slowly trending downward. This remains a legitimate concern for Linn, especially since it's '16 natural gas hedges are still a problem.

      Overall though, the company is in far better shape with Berry than without, even at the 1.68x ratio. Management was going to do whatever it took to close the deal, come hell or high water.

 
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