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(Reuters) - U.S. oil and gas producer Linn Energy LLC LINE.O will buy Berry Petroleum Co BRY.N for $2.5 billion in stock, raising its output by about a third and boosting its oil reserves in Texas, California, Colorado and Utah.
The acquisition, Linn's largest, will raise the proportion of oil in the company's reserves at a time when gas prices have fallen due to oversupply from North American shale fields.
The deal was valued at $4.3 billion including debt, the companies said in a joint statement on Thursday.
Linn's shares rose 4 percent to $38.52 in early trading. Berry's stock rose 18 percent to $45.76, the second-highest percentage gainer on the New York Stock Exchange.
Houston-based Linn has made a series of acquisitions in the past two years in pursuit of output growth. Chief Executive Mark Ellis told Reuters last March that the company would spend up to $2 billion a year on deals.
The company bought natural gas reserves in Kansas from BP Plc (BP.L) for $1.2 billion last year, and followed that up by acquiring the British company's gas acreage in southwest Wyoming for $1.03 billion.
Gas prices, however, have been depressed as the advent of new drilling methods such as hydraulic fracturing has created excess supply in North America.
By adding Berry's reserves in California, the Permian Basin in Texas and the Rocky Mountain region, as well as acreage in Utah's Uinta Basin, Linn will increase its liquids exposure to 54 percent of reserves from about 46 percent as of December 31.
The addition of Denver, Colorado-based Berry's properties would also bring in about 240 million cubic feet equivalent per day (mmcfe/d) of production, raising Linn's total output by 30 percent, the companies said.
Ellis has called his company "commodity agnostic" when it comes to acquisitions. Linn has greater access to capital than many of its rivals due to a structure allowing it to reduce its tax burden by passing on most of its cash flow to unitholders.
"Linn is not done with acquisitions and the market should extrapolate that to other potential targets such as Whiting Petroleum Corp (WLL.N)," said Robert W. Baird & Co analyst Ethan Bellamy. Whiting shares were down 1.5 percent at $47.88.
The deal is the first acquisition of a public C-corporation by an oil and gas producer structured as a master limited partnership (MLP) or a limited liability company.
Unlike C-corporations that are taxed separately from their shareholders, MLPs are exempt from paying corporate income tax and distribute most of their earnings directly to investors.
"Expect other small- and mid-cap exploration and production C-corps to rally," said Bellamy.
Berry will be converted into a limited liability company under the deal, allowing Linn to own Berry's assets in a pass-through entity without any immediate payment of tax.
The companies said the transaction was forecast to add more than 40 cents per unit in the first full year following closure, expected by June 30.
Linn will recommend that its board increase the current quarterly distribution to 77 cents per unit, from about 72 cents per unit, effective the third quarter.
Berry shareholders will receive 1.25 shares of LinnCo LLC LNCO.O, a company set up by Linn to raise money for acquisitions and other purposes. LinnCo, which went public in October, only owns Linn units and has no assets or operations.
Berry shareholders will get an equivalent of $46.24 per share based on LinnCo stock's closing price of $36.99 on Wednesday. This is a 19.8 percent premium to Berry's closing price of $38.59.
The company had 54.15 million shares outstanding as of October 26.
Linn's offer is higher than Berry's intrinsic value of $44.06 per share as measured by Thomson Reuters StarMine.
The StarMine model is a measure of a stock's current value when considering analysts' growth estimates for five years, and then modeling the typical growth trajectory over a longer period of time.
"Linn is simply taking advantage of (a) disconnect between Berry trading at 5.6 times 2013 enterprise value/earnings before interest, taxes, depreciation and amortization (EBITDA) versus Linn at 8 times enterprise value/EBITDA," Tudor Pickering analysts said.
Citigroup Global Market advised LinnCo, while Latham & Watkins LLP was the legal adviser to Linn and LinnCo. Credit Suisse Securities advised Berry, and Wachtell, Lipton, Rosen & Katz was the legal adviser.
Additional reporting by Krishna N Das; Editing by Roshni Menon, Sriraj Kalluvila, Supriya Kurane