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Linn Energy: The Value Of Berry Petroleum

Summary

Berry is expected to become a stand-alone company again after Linn's Chapter 11 filing.

Berry's break-even point is estimated at $68 oil and $3.50 natural gas.

This a significantly higher break-even point than the new Linn due to high projected expenses (LOE and G&A) for Berry as well as California carbon allowance costs.

The value of Berry's unsecured bonds depends on whether Berry's cost structure can be significantly reduced.

With its current projected cost structure, Berry may face financial difficulties within a few years.

As part of Linn Energy's (NASDAQ:LINE)(NASDAQ:LNCO) bankruptcy filing, Berry Petroleum is expected to end up as a stand-alone company again. In this article, I will look at the potential value of Berry similar to how I looked at the value of a post-restructuring Linn Energy. There is more uncertainty about Berry since the amount of first-lien debt it will have post-restructuring hasn't been resolved yet.

Assumptions

I have made a few assumptions to help with the calculations. One assumption is that Berry won't separate from Linn until the end of the year. Until then, Berry's revenues and expenses will be funded via Linn. As well, I will assume that Berry will emerge from restructuring with around $650 million in debt. The unsecured notes will be converted into equity, while the $250 million in restricted cash goes towards paying down the credit facility. This will reduce the credit facility borrowings to $623 million, which I've bumped up to $650 million to cover various restructuring costs.

If we assume that Berry ends up with a roughly similar debt structure to Linn, it will have a $400 million term loan at LIBOR + 750 basis points and a $550 million borrowing base for its revolving credit facility at LIBOR + 350 basis points. Initially, Berry will borrow $250 million under its credit facility. This will rise to approximately $340 million at the end of 2017 due to $90 million in expected cash burn at strip prices.

New Break-even Point

Berry's break-even point based on 2018 production projections is estimated at roughly $68...


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