Linn Energy (LINE) continues to be one of the more unit-holder friendly MLPs out there. The company has recently announced that it plans to change its distribution policy from quarterly to monthly payments. In addition, Linn Energy made history when it became the first ever upstream MLP to acquire a public C-Corp when it announced its $4.3B stock-for-stock merger with Berry Petroleum (BRY). Once this merger is completed, the company has announced that it will modestly boost its distribution. Linn Energy currently offers a $0.725 quarterly dividend and as of Thursday yields about 7.5%.
On April 25, Linn Energy and LinnCo (LNCO) (LinnCo is a company set up to solely hold Linn Energy units and payout the distributions as common share dividends) reported their Q1 2013 earnings results. For the quarter, Linn Energy reported daily production of 796 MMcfe/d, a 69% increase from the prior year. Adjusted EBITDA came in at $356M, an 18% increase from the prior year.
During the quarter, Linn Energy's distribution coverage ratio deteriorated to 0.88X, from the 1.07X reported last year. This was primarily caused by a decrease in distributable cash flow, or DCF. DCF fell 15% to $150.5M, or $0.64 per unit, from the $176.6M, or $0.77 per unit, reported last year. During the quarter, Linn Energy was negatively affected by lower than expected oil production, adverse weather, and infrastructure related curtailments. However, Linn Energy does expect the coverage ratio to increase throughout the year. The company projects a 1.07X coverage ratio for the 2nd half of 2013, assuming six months of contributions from Berry and the anticipated 6.2% distribution increase.
Linn Energy benefited greatly from hedges during the quarter. Its hedged realized average price for natural gas was $5.23 per Mcf. This is $1.85 per Mcf more than its unhedged realized average price of $3.38 per Mcf. Linn Energy's hedged realized average price for oil was $91.64 per Bbl. This is $2.51 per Bbl more than its unhedged realized average price of $89.13 per Bbl. During the Q1 conference call, Linn Energy mentioned that Berry has hedged a portion of its production. For 2013 and 2014, production from Berry has been approximately 90% hedged for the second half of 2013 and 86% for the full year 2014 at prices above $90 per barrel. As of quarter end, Linn Energy had nearly 100% of its anticipated energy production hedged.
Along with its earnings results, Linn Energy announced changes to its distribution policy. Linn Energy and LinnCo will change from quarterly payments to monthly payments starting in July 2013. At the current annual rate of $2.90, the new monthly distribution would be $0.2416 per month. In addition, Linn Energy plans to increase its distribution to $3.08 annually, or $0.2566 per month, immediately following the closing of the Berry merger.
The change to monthly distributions should be seen as an extremely unit-holder friendly move by Linn Energy. Monthly income is highly valued and should allow for faster compounding. It should also allow for the company to offer more incremental increases to the distribution.
As of this writing, Linn Energy was trading at a massive 10% discount to LinnCo. IMO, this is unjustifiably large. While LinnCo does offer some tax advantages, it should trade at or near par with its parent. This is the inverse of the situation that Kinder Morgan Management (KMR) is facing. I would suspect that either Linn Energy is currently undervalued, or that LinnCo is overvalued. Nevertheless, both stocks offer solid sources of income.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.