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Linn Energy (NASDAQ:LINE) has seen its shares fall from over $25 in June to $11.98 last week as the natural-gas and oil markets weakened significantly. But if the firm can maintain its cash-flow distributions, says Barron's Jonathan Laing, shares could roughly double over the next year.

Structured as a master limited partnership, Linn pays out 60%-70% of its quarterly cash flow to its shareholders in tax-advantaged distributions. Investors are worried weak energy prices will halt these payouts, and that frozen capital markets will halt Linn's strategy of growth through acquisition.

Still, as Barron's puts it, "such concerns seem amiss." Linn has carefully hedged itself against fluctuations in the energy market and locked in favorable prices over the summer going out 3-4 years. The company's distribution level is relatively safe for at least the next two years, says Citigroup analyst Richard Roy, even without any acquisitions. Linn's operating philosophy is relatively conservative, focused on yield generation rather than making flashy new discoveries. Its fields have long lives with steady, slow declines in annual production.

Even with capital markets frozen, the company still has some financial flexibility. It has sold three properties this year to its advantage, bringing in around $1B. As a result of the sales, Linn now has around $500M of borrowing capacity in its credit facility, even after taking into account a $100M stock buyback plan that the company approved but has not yet acted upon. The buyback leaves Linn plenty of leeway to defend its stock price.

  • Citigroup analyst Richard Roy has a one-year price target of $22.
  • John Kang, of RBC Capital Markets, has a price target of $27 for Linn, more than twice its current price.

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  • Linn Energy: Q3 EPS of $0.45 misses by $0.04. Revenue of $240.6M (-5.9%) vs. $217.3M. (PR)
Source: Barron's Finds a Win in Linn