Linn Energy LLC (NASDAQ:LINE), along with its former unit LinnCo LLC (NASDAQ:LNCO)), disclosed that both companies are the subject of an informal U.S. Securities and Exchange Commission inquiry, related in part to LinnCo’s proposed merger with Berry Petroleum Company (NYSE:BRY).

Linn Energy

Linn Energy and LinnCo Cooperating Fully With the SEC

Linn Energy LLC (NASDAQ:LINE) / LinnCo LLC (NASDAQ:LNCO) announced that the SEC had launched an informal inquiry into its business. The issues being examined  include the  proposed  merger  with  Berry Petroleum Company (NYSE:BRY), certain  non-GAAP  financial  performance  metrics,  and the company’s  hedging policy.

In RBC Capital’s opinion, there are two key take-aways worth noting. First, the SEC has clearly stated that its inquiry should in no way be construed as an indication of a negative view held by the commission on LINE. Secondly, RBC notes that Linn Energy LLC (NASDAQ:LINE) voluntarily disclosed this action by the SEC and continues to cooperate with the commission to its fullest ability.

Real Risk of Negative Findings

With  the  announcement  of  the  inquiry  by  the  SEC,  RBC acknowledges that the headline and subsequent investors’ concerns are likely to put pressure on units/shares of Linn Energy LLC (NASDAQ:LINE) / LinnCo LLC (NASDAQ:LNCO). Unfortunately, it is impossible to predict these types of events, and while RBC remains confident  in  the  management  team  and  the  business  model,  They  have very  little  tangible  information  on  which  to  base  a  supportive  stance. Additionally, the risk of a negative finding by the SEC is real. That said, unfortunately all we can do is wait and see the outcome at this point.

Management “Committed” to BRY  Transaction, Delay Likely

Management  reiterated  its  commitment  to  the  transaction.  In  RBC’s opinion,  until  such  time  as  the  informal  inquiry  has  concluded  or additional relevant details are made available, they would not expect any material progress in the filing approval process, ultimately delaying the deal. They estimate that in order to return the Berry Petroleum Company (NYSE:BRY) offer to the level of premium implied at the time of the offer, the share exchange ratio would need to be increased to 1.39x, an increase of 11 percent.

Linn Energy called Berry Petroleum Company (NYSE:BRY)’s long-life, low-decline, mature assets “an excellent fit,” and said the acquisition would increase Linn Energy’s presence in California, the Permian Basin, East Texas and the Rockies, as well as adding an attractive new core area in the Uinta Basin.

Wait and See, Best We Can Do

RBC places a low probability on the SEC discovering  anything  materially  wrong.  That  said,  the  risk  does  exist. Without  any  incremental  information,  they  can  not  fully  discount  the inquiry, but simply wait and see its outcome. When all is said and done, they believe that this process will ultimately provide the necessary validation into Linn Energy LLC (NASDAQ:LINE)’s practices to end the recent controversy once and for all.

Linn Energy closed Monday at $33.29, while LinnCo ended at $37.07. Both stocks are inactive premarket. Linn Energy shares are down 5.5 percent since the start of the year, while LinnCo LLC (NASDAQ:LNCO) shares have added 2.6 percent for the same period.