Barron's Finds a Win in Linn

Linn Energy (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)

Comments

[{5U}:]

Barron's and the financial media have all decided to go bullish because if they continue to be bearish their ad revenue and readership will fall off a cliff

2008 Dec 28 08:32 AM

[John Cordes:]

The previous quarter's efforts of hedging by LINN were a disaster.

2008 Dec 28 08:40 AM

[IRM:]

Huge and continual insider selling in LINE. I'd feel pretty silly to buy into that!

2008 Dec 28 10:31 AM

[searcher:]

Nonesense, the 'media' is a trend follower, as the affirmation of even negative trends is where revenue lies, and they will not be found in the 'vanguard', even of an illusory reversal.

2008 Dec 28 11:03 AM

[elliot_mllr:]

LINN is not a Master Limited Partnership and the above article and Barron's are wrong in stating that it is. Linn is a Limited Liability Company, and its name is Linn Energy LLC. There are significant differences. An LLC does not have a general partner, there are no incentive distribution rights, and its members vote, unlike MLPs. There are many other differences as well, and authors should be careful to avoid mis-characterizing entities since many legal consequences flow from the proper characterizations.

2008 Dec 28 11:34 AM

[k45:]

The Barron's article sure sounded good (warning bells, "too good to be true"?). But a quick look at the stock's financials on Google finance looked pretty scary. Too many big negative numbers there for me to feel comfortable.

In the distant past, I've found some great stock picks in Barron's (e.g. FCFS) but lately I can't get excited about their recommendations. Maybe I'm wrong.

2008 Dec 28 11:38 AM

[Greg Pinelli:]

It's amazing how little some people seem to know about an equity but feel compelled to say something. Barron's is spot on..LINE is one of the best, if not THE best, safe haven oil/gas company in the US. The particular structure of the company, whether LLC or MLP, is not nearly as significant as the nature of its asset base and its committment to investor distributions..please consider...
1. LINE is fully hedged thru 2009 at prices that mean it's payout, regardless of spot prices of oil, is assured.
2. Cash flow is the dominating feature of all the company's structures like this (and also for Royalty Trusts or MLPs..etc). Anyone who looks at the financials on Google and determines LINE or PWE or LGCY are deficient simply isn't doing their due diligence.
3. There has NOT been substantial insider sellng..shares have been sold by officers in a very orderly (per SEC requirements) manner and insiders have substantial positions.
4. Over a decades worth of reserves and a very forward looking management..
As for the nmedia..what media do some of you mean? CNBC..Bloomberg's...Wa... Journal??? Barron's has ALWAYS been one of the more iconoclastic and skeptical of all the print equity journals...I listen to the media most of the day at the financial sites and the overwhelming tone has been negative..I hear varied views and counterviews.
Nice synopsis of the article...LINE is going to prove highly profitable to investors with enough cajones to put their money on the table.

2008 Dec 28 03:54 PM

[REBEL:]

Linn, with a yield currently over 20%, is a great stock to hold. ANY stock distributing that amount of cash to shareholders in this market - if they can maintain that yield - is a great stock to buy.

2008 Dec 28 05:03 PM

[mc2406:]

I own some LINE, and think it was worth investing in. I'm still concerned, however, that the overall economic mess will continue to bring it down along with other leveraged energy dividend plays. Until the market starts reacting rationally (are those days over?) I'm not buying her agrument. Check what the analysts one year price targets were three or four months ago. Are they any smarter now?

2008 Dec 28 07:49 PM

[mplaut:]

Pinelli is right about LINE. If you look at EPS you will be fooled. Because of LINE's hedges, which fluctuate with the price of the commodities being hedged (gas and oil), the EPS has gone up and down in the past year very wildly. However it is all paper gains and paper losses. When oil and gas shot up in the first half of the year, LINE's hedges showed huge paper losses since they were below the current price. But that made no difference to cash flow and would never have made any difference. If the price had held up, LINE would have just produced and sold at the current price and paid the difference between its hedges and the spot price and kept the hedge price.

Now that the price has come down, they recorded large mark-to-market gains, but cash flow is steady because of the hedges. [Although note that LINE reset some of the hedges during the high prices to take advantage of the rise.]

LINE actually has about 20 years of reserves at current production levels, and can grow production by 4-5% without new acquisitions, funding the drilling from cash flow.

Insiders have been net buyers of the stock over the past half year. Michael Linn sold a small amount of stock for tax purposed but he still owns over 4,000,000 shares.

2008 Dec 29 05:29 AM

[User 283977:]

I have owned LINE for a while now.. it has good management, and a great yield. Mplaut is right, they have good cash flow, and the EPS is a misleading indicator due to hedges.

2008 Dec 29 10:26 AM

[einstein p ...:]

I've owned LINE for a while, trading it for a while and picking up a position around 11. If and when it goes to 22, I'll sell half the position.

Management sold some stock, which was nothing out of the norm, and made some negative remarks,which sent the stock down to a very attractive level. The comment was directed more at the industry as a whole than it was to the company. The company is well hedged for 2009 and 2010, which leads me to believe that the Barron's article was correct in assuming the dividend is safe.

I still believe that oil is spring loaded to go much higher over the next six months. The current price is simply not sustainable. Any geo-political event or series of events will certainly drive the price higher. Just look at the reaction to the Israel and Palestine ---- and neither country produces a drop of oil. If the region destabilizes, however, oil will soar. Seems doubtful that oil prices can remain at these levels for six more months, let alone two more years --- so this stock looks like a winner to me.

The "pundits" predicting 25 dollar a barrel oil should pull their heads out of their butts. Too dangerous in this environment and impossible to sustain.

2008 Dec 29 07:39 PM

[Greg Pinelli:]

Correct einstein...in many cases management (especially at LINE) has tied their entire future to the company and selling stock options is simply a way to pay some bills and move on.
LINE is especially well managed..ALL OF US LONGER TERN HOLDERS HAVE HAD LOSSES...I bought a great deal more at 11.00 and 12.00 a share and believe that it will be one of the truly remarkable stories of 2009.....


On Dec 29 07:39 PM einstein p fleet wrote:

> I've owned LINE for a while, trading it for a while and picking up
> a position around 11. If and when it goes to 22, I'll sell half
> the position.
>
> Management sold some stock, which was nothing out of the norm, and
> made some negative remarks,which sent the stock down to a very attractive
> level. The comment was directed more at the industry as a whole
> than it was to the company. The company is well hedged for 2009
> and 2010, which leads me to believe that the Barron's article was
> correct in assuming the dividend is safe.
>
> I still believe that oil is spring loaded to go much higher over
> the next six months. The current price is simply not sustainable.
> Any geo-political event or series of events will certainly drive
> the price higher. Just look at the reaction to the Israel and Palestine
> ---- and neither country produces a drop of oil. If the region destabilizes,
> however, oil will soar. Seems doubtful that oil prices can remain
> at these levels for six more months, let alone two more years ---
> so this stock looks like a winner to me.
>
> The "pundits" predicting 25 dollar a barrel oil should pull their
> heads out of their butts. Too dangerous in this environment and
> impossible to sustain.
>

2008 Dec 31 09:13 PM

[Greg Pinelli:]

mplaut...I have owned LINE (5000 shares) and continue to buy when the market discounts it..I've invested for 40 years and can honestly tell you I've RARELY met a management that is as forward looking or puts their money where their mouth is as LINE executives..EVERYONE OF THEM HAS HITCHED THEIR FUTURES TO THIS EQUITY...it will very likely move back past $20 this Spring...this is an equity for the longer term holder..distributions MUST be allowed to play out.....My best wishes!


On Dec 29 05:29 AM mplaut wrote:

> Pinelli is right about LINE. If you look at EPS you will be fooled.
> Because of LINE's hedges, which fluctuate with the price of the commodities
> being hedged (gas and oil), the EPS has gone up and down in the past
> year very wildly. However it is all paper gains and paper losses.
> When oil and gas shot up in the first half of the year, LINE's hedges
> showed huge paper losses since they were below the current price.
> But that made no difference to cash flow and would never have made
> any difference. If the price had held up, LINE would have just produced
> and sold at the current price and paid the difference between its
> hedges and the spot price and kept the hedge price.
>
> Now that the price has come down, they recorded large mark-to-market
> gains, but cash flow is steady because of the hedges. [Although note
> that LINE reset some of the hedges during the high prices to take
> advantage of the rise.]
>
> LINE actually has about 20 years of reserves at current production
> levels, and can grow production by 4-5% without new acquisitions,
> funding the drilling from cash flow.
>
> Insiders have been net buyers of the stock over the past half year.
> Michael Linn sold a small amount of stock for tax purposed but he
> still owns over 4,000,000 shares.

2008 Dec 31 09:18 PM

[citoriuser:]

Greg P:
I am sitting here on the couch with last week's copy of Barron's. Why should I believe their analysis of LINE (which is appealing) when I believed their analysis of LEH in June 2007? I recognize that they have been correct in the past on many occasions but the catastrophic failure of recommending LEH 15 months before they went bankrupt causes me to pause. I rode LEH into the ground as I felt it was an overreaction to sell based on external pressures (read credit freeze). I don't have access to the inside info that a Barron's reporter does so due diligence on my part can not go much deeper than reading articles and posts on the web (much of which is useless as you stated in a previous post). Please comment. I am a new investor and trying to learn. Any suggestions?
Thanks.


On Dec 28 03:54 PM Greg Pinelli wrote:

> It's amazing how little some people seem to know about an equity
> but feel compelled to say something. Barron's is spot on..LINE is
> one of the best, if not THE best, safe haven oil/gas company in the
> US. The particular structure of the company, whether LLC or MLP,
> is not nearly as significant as the nature of its asset base and
> its committment to investor distributions..please consider...
> 1. LINE is fully hedged thru 2009 at prices that mean it's payout,
> regardless of spot prices of oil, is assured.
> 2. Cash flow is the dominating feature of all the company's structures
> like this (and also for Royalty Trusts or MLPs..etc). Anyone who
> looks at the financials on Google and determines LINE or PWE or LGCY
> are deficient simply isn't doing their due diligence.
> 3. There has NOT been substantial insider sellng..shares have been
> sold by officers in a very orderly (per SEC requirements) manner
> and insiders have substantial positions.
> 4. Over a decades worth of reserves and a very forward looking management..
>
> As for the nmedia..what media do some of you mean? CNBC..Bloomberg's...Wa...
> Journal??? Barron's has ALWAYS been one of the more iconoclastic
> and skeptical of all the print equity journals...I listen to the
> media most of the day at the financial sites and the overwhelming
> tone has been negative..I hear varied views and counterviews. <br/>Nice
> synopsis of the article...LINE is going to prove highly profitable
> to investors with enough cajones to put their money on the table.

Jan 01 03:52 PM