Negative news hurled at Linn Energy (LINE) fueled a massive sell-off on the trading floor. Consequently, shares plummeted towards the 52-week low on May 6 at $34.26 during intraday trading, losing 7% in one day. Ironically on the same day, the company released the second dividend payout for this year at $0.725 per share.
Linn Energy religiously pays out dividends to its shareholders year-on-year since 2006. However, its financials are getting weaker, leading to growing concerns among many investors. The negative news further adds to the financial issues, causing some shareholders to sell their positions at losing prices. However, I think the recent plunge of Linn Energy opens an excellent opportunity for traders to secure a good investment position for the long haul.
Linn's Latest Financials
For the first quarter of 2013, Linn highlighted growth in oil production output and EBITDA. But all positive highlights were erased by the rising net loss. The firm incurred a net loss of $221.885 million versus the year-ago first quarter net loss of $6.202 million. This is due, in part, to the merger transaction costs when Linn acquired Berry Petroleum (BRY). Other contributory factors include unrealized losses on commodity derivatives and impairment of long-lived assets.
On the positive side, Linn improved its production by 69% at 796 MMcfe/d in the first quarter 2013. During the same period of 2012, the production was only 471 MMcfe/d. Its EBITDA also grew by 18% from $302 million for the first quarter 2012 to $356 million this year.
At present, Linn has a market capitalization of $8.26 billion. Its total cash is almost at par with its total debt at $6.03 million and $6.19 million, respectively. The current ratio is 0.98, while the debt/equity ratio is 1.53.
Linn Energy is a relatively attractive dividend stock with an 8% yield from its current price. For the last five years, the average annualized dividend payout is $2.637 per share, with dividend growth year over year. In 2008 and 2009, the annualized dividend payout was unchanged at $2.52 per unit. The company increased the amount to $2.58 in 2010. Another increase was seen in 2011 to $2.7 per share.
For the fiscal 2012, Linn Energy further increased the annualized dividend payout by 6% at $2.865 per share. For the last 5 quarters, the quarterly dividend was steady at $0.725 per share. But in the next quarters, the company announced that it will increase the dividend payout amount to $0.77 per share. This is equivalent to $3.08 on an annualized basis. If this will materialize, the total dividend payout for 2013 will sum up to $2.99 per share. This will be another 6% growth over last year.
Overview of Berry Petroleum Acquisition
Berry Petroleum is a 3-basin energy company. Since 1909, it engaged in the exploration and exploitation of crude and natural oil. It first operated the San Joaquin basin. In 2003, the company added the Ulinta basin of Utah. Eventually, the Permian basin was added. At the end of 2011, Berry had about 275 million barrels of oil equivalent [BOE] in its proved reserve.
Berry Petroleum is a mid-cap company with market capitalization of $2.43 billion The latest full year income statement showed revenue of $1 billion, with 14.5% year-on-year growth on quarterly revenue. The company posted $169 million net income from the $675 million gross profit, with profit margin of 16.84%. For the first quarter of 2013, Berry reported net earnings of $32 million. This is equivalent to $0.58 per diluted share.
Berry's oil and natural gas production for the first quarter saw a slight increase from the fourth quarter production. The firm produced 31,155 BOE/D of oil, up 24% compared to the same year-ago quarter. This comprised 79% of the firm's total production. On the other hand, it produced 8,522 BOE/D of natural gas comprising 21% of the total output.
The total production of Berry's oil and natural gas will definitely add up to Linn's portfolio. This will further strengthen the company and make it even more competitive against its peers.
What About Others?
One of Linn's closest peers is the Plains All American Pipeline (PAA). While Linn's last 3 quarterly dividends were higher than PAA, the total 2012 annualized dividend of PAA was higher. For the first 3 quarters in 2012, the quarterly dividends of PAA were $1.025, $1.045, and $1.065 per share. The amount was reduced by half in the fourth quarter to $0.5425 per share. However, this is due to a 2 for 1 unit split. Once we adjust for historical distributions, we observe an increasing in trend in PAA's dividends.
The annualized 2012 dividend of PAA summed up to $3.6775 per share. The company's annualized distribution rate is $2.3.
Moving forward, LINE is more attractive in terms of dividends. It yield is almost double that of Plains All American Pipeline. But when it comes to financials, it's completely different. PAA is more stable with higher market capitalization of $19.66 billion. In term of revenue, PAA stood out with $39 billion compared to LINE's $1.77 billion revenue. While Linn incurred full year net loss of $606 million, Plains All American posted net income of $1 billion.
On the trading floor, PAA shares were upbeat since the start of the year. As of May 17, shares remarkably gained more than 30% since January.
Linn Energy is still an attractive dividend stock despite the negative review of Barron's. Its weak financials, mainly due to net losses, were driven by massive capital acquisitions. But such a move is expected to further strengthen the company especially with the merger of Berry Energy.
In fact, it is raising the dividend payout amount after Berry is fully integrated. This is one of the signs that management has a better and optimistic outlook for Linn Energy. Thus, its recent plunge in share price creates a good position for investment. There is high chance for future gains from shares when it bounces back after full integration of Berry. On top of that, shareholders will also enjoy higher dividend yields.