Linn Energy: 0.2416 Reasons To Own

| About: Linn Energy, (LINEQ)

It seems that each day the long-term future is looking brighter every day for Linn Energy (LINE) and Linn Co (LNCO). Earlier, I shared with you the reason that I am adding to my position in anticipation of what I view as a significant catalyst, the vote and approval of the merger between LINE, LNCO and Berry Petroleum (BRY). In the past, I have opined that LINE the main holding of LNCO had sufficient operations to keep paying its lucrative monthly distribution independent of any future merger and acquisitions. Now that it seems the deal will go through, I am ever more confident that the distribution can be maintained.

I don't just think it can be maintained, I think if the deal goes through, increases are likely coming. It can handle things on its own right now. This is evidenced by the fact that in its most recent quarterly report, we learned that LINE increased production 5% to an average of 823 MMcfe/d for the third quarter 2013, compared to 782 MMcfe/d for the third quarter 2012. I do not believe acquisitions are necessary in my opinion for growth, but certainly helps accelerate production growth. Most of LINE's production is natural gas. One of the critical points to the BRY merger is oil production. With BRY's annual production numbers, LINE could see an increase in production anywhere from 20%-40% and about three quarters of BRY's reserves are in oil. Thus this merger will increase LINE's liquid oil exposure by approximately 16%-17% on a relative scale. Production will grow, revenues will rise, and ultimately, distributions to unitholders should rise.

Recent Developments Provide More Reason To Own Units

This morning we learned that LINE had announced its latest distribution. I was very pleased to see that it had maintained the distribution of $0.2416 monthly per unit. Unlike in past months, it seems the distribution coverage is on the rise. This is attributable to increased production, though lower oil prices could be a risk. However, with the merger with BRY right around the corner (but not in stone yet) this maintained distribution is a sign of health and a buy signal for the company in my opinion. Based on the current unit price of $30.00, the annualized yield for the partnership is now 9.7%. Why is this important? It shows that the partnerships operations are sufficient on its own to maintain this distribution and continue offering a sizable yield to unitholders. Should the BRY deal still get voted down, unitholders can still bank on a 9.7% plus yield annually from their holdings. But, given that the deal will likely go through, I see distributions rising in 2014 provided costs are controlled and oil and natural gas prices remain at current levels or higher. All things considered, many of the LINE shorts and the LINE bashers claimed the distribution would be cut and further argue the partnership is too expensive. In my opinion, it is expensive if you do not consider future production, future revenues and future distribution increases. The current monthly distribution of $0.2416 will be paid December 17th to unitholders of record as of December 12th.

To Be Fair, Be Aware of Risks

While I think this distribution announcement is another buy signal, be aware there are real risks. I have said it before but it bears repeating. It seems that oil is trending lower. It may be temporary into spring 2014 where it can take off once again into summer. But if it does not and trends even lower, this will pressure margins. For those buying now, it is possible that it may take several quarters before any capital gains are had. Unrealized losses are possible if oil trends lower. A double whammy occurs if both oil and natural gas plummet. Despite these possibilities, the distribution being maintained, coupled with current production taken into account as well as the boost in production expected with the BRY merger, the partnership looks strong going forward. My sentiment remains that this is a strong buy for the future.

Disclosure: I am long LINE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.