It's not everyday that you get to buy two energy companies for the price of one while both are "on sale" by more than 7%. That's why I'm writing this brief article to all our loyal readers.
Linn Energy (LINE), which is in the process of buying Berry Petroleum (BRY), was rocked by an article over the weekend that questioned some of its accounting practices. It was mainly a repeat of an article that came out in February with very similar arguments.
On this news alone, LINE traded down on Monday more than 7% hitting a 52-week low of $34.27 on very heavy volume. LINE pays a $3.08 dividend, so this pushed the current yield-to-price up above 9%.
Perhaps investors are worried that this dividend yield is unsustainable, with the payout ratio currently on the high side. It is somewhat troubling that the company has over $6 billion in debt and $650 million of operating cash flow (trailing twelve months) as of March 31, 2013.
Yet sales growth and revenue for the first quarter 2013 was up almost 36% to $1.77 billion. When it comes to the accounting allegations, none other than Wells Fargo (WFC) defended Line following the negative Barron's article over the weekend.
Wells Fargo said the article overstates the old points under question and it reiterated its "Outperform" rating, given a "Secure distribution and [ongoing] growth." Linn Energy shares began to rebound almost immediately after the firm's comments on LINE.
Stephanie Link, the Research Director at TheStreet.com, also commented affirmatively on the situation with LINE:
"Importantly, we don't see this as changing the 6% annualized distribution growth at the company, which it just reiterated on its first-quarter conference call.
"We chose Linn Energy because of its acquisition strategy and strong future distribution growth and the advantage of its C-Corp. LinnCo (LNCO) structure in this process. We like the Berry Petroleum story, the production growth potential and the fact that the stock has lagged its peers year to date -- 8x EBITDA (below its five-year average of 8.9x and 10-year average of 9.7x)."
The deal to buy BRY and its profitable energy enterprise closes the end of June, so the benefits would not be felt until the second half of the year. Yet with a generous, shareholder-friendly approach, LINE will pay patient investors well to wait for the future benefits of the synergies of these two energy companies.
Let's look at the following 1-year chart of LINN and BRY, which helps us to see how today's sell-off may be a buying opportunity.
Do your own due diligence before buying, but the fundamentals of both LINE and BRY are compelling. With the upcoming completion of the BRY acquisition, buying shares of LINE at current price levels is, from my perspective, like getting two energy companies for the price of one at an attractive discount.