The Linn twins, Linn Energy LLC (LINE) and LinnCo LLC (LNCO) continue the companies' policies of an investor friendly focus with a change to monthly dividend payments and projections for very healthy distribution increases later in 2013.
Note: limited partnership companies such as Linn Energy have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of LP units apply including the tax consequences of investing in LP units.
First Quarter Results
For the 2013 first quarter, Linn Energy reported a 69% increase in average daily oil and gas production, an 18% increase in adjusted EBITDA and a 26% decrease in lease operating expenses. However, because of weather and infrastructure related slowdowns production was less than forecasts and the distributable income for the quarter was just 88% of the dividend paid.
The increased year-over-year production was primarily due to acquisitions over the last year. Since asset purchases are funded by a combination of selling new LP units and borrowing, the increased production did not reach all the way to the expected cash flow level on a per share/unit basis.
The earnings press release described the production curtailments as such:
"In February and March, the Texas Panhandle, Oklahoma and Kansas experienced severe winter weather, which caused significant shut-ins and drilling delays. In addition, infrastructure curtailments in the Permian Basin region resulted in lower than expected production volumes caused by shut-ins and high line pressures. Finally, production volumes from the Jonah Field were negatively affected by ethane-rejection in the region due to the depressed price of ethane.
The big news of the first quarter was the announcement of the $4.3 billion acquisition of Berry Petroleum Company (BRY). Linn was able to use the LinnCo spinoff to have the right "currency" in the form of LNCO shares to make an all share purchase offer for Berry Petroleum.
A second quarter dividend of 72.5 cents will be paid on May 8 (record date) for both LINE and LNCO units. For those new to LinnCo, the company is a limited partnership that files taxes as a corporation with investors receiving a 1099-DIV instead of the usual partnership Schedule K-1. Each LinnCo unit is backed by one Line Energy unit.
Changes For Dividend Payments
The other big news in the earnings press release is the shift to monthly dividends for both Linn Energy and LinnCo. Starting in the second quarter, a monthly dividend will be paid three month later. The first monthly payment will be for April 2013 with a record date of July 10. The second quarter monthlies - paid in July through September - will be $0.2416 per unit, maintaining the current $2.90 annual rate.
Starting for the third quarter and paid in the fourth quarter the monthly dividend is forecast to increase to $0.2566 or $3.08 per year. The higher rate is contingent on board approval and closing the Berry Petroleum deal before the end of the second quarter.
At current share prices and with the $2.90 annual distribution, Linn Energy currently yields 7.4% and LinnCo sports a 6.75% yield. The investing world is starting to see the point of my Is LinnCo LLC The Perfect Income Stock? article and bidding up the LNCO share price.
Linn Energy is the leading exploration and production LP company and there is no reason to not believe the company can continue to generate mid to high single-digit distribution growth. The third quarter dividend rate does not include any synergies from the Berry merger and the company has plenty of dry powder in the form of a $2.9 billion available on a newly increased $4 billion credit line and the price premium from issuing more LNCO shares to pursue more asset acquisitions.
Another point in the favor of Linn Energy and similar companies is the rising price of natural gas. During the Q1 conference call, management indicated that some currently shut-in gas wells turn profitable if gas pushes through the $5 mark.
So for IRAs or investors who just do not like K-1's, take a look at LNCO. For an extra bit of yield LINE will eventually benefit also from the LNCO premium pricing. Note that the company expects the LNCO dividends to be classified as return of capital in 2013.