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  • Expectations for Linn are very low. Management merely has to meet its own estimates and fund distribution from cash flow.
  • Linn has continued opportunities for efficiency improvement and organic growth.
  • Technicals show support at around $27-$28 for both corporate and partnership shares.

For those long Linn Energy (NASDAQ:LINE) or LinnCo (NASDAQ:LNCO), 2014 has thus far been a bit disappointing despite the conclusion of the SEC inquiry and the execution of the acquisition of Berry Petroleum. Linn's quarterly guidance was disappointing, as were full-year results for 2013. Distribution coverage for 2013 was a razor-thin 1.01 times, a trend that looks to continue in 2014 as the Berry acquisition has proved to be not yet accretive to cash flow per share.

As a result, shares and units of both the corporation and the partnership have dropped from around $33 to around $27 and $28, respectively. For investors who were around last summer, Linn's drop is reminiscent of the savaging price action of that time.

This article will try to shed light on Linn's price action with one question in mind: "Has Linn bottomed?" In doing so, this article will focus on fundamentals, technicals, and finally some commentary on how Linn is doing as a business.


Data based on full year DCF results for each respective partnership

In a previous article some months ago, I mentioned that Linn was regaining the premium it had lost last year among its upstream MLP peers. Well, Linn has lost that premium yet again. Among the other high-quality upstream MLPs, Linn is right back into the middle range.

The big drag on Linn's results right now is a product of the amended Berry acquisition. To complete the acquisition, Linn had to up its offer from 1.25 LinnCo shares to 1.69 shares for each 1 share of Berry Petroleum. The increased dilution is weighing down on per share cash flow, hence, the company's razor-thin coverage ratio.

Linn must first improve its coverage ratio before shares and units can recover lost ground. Management explicitly expects 2014 distributions to be fully covered this year.


(click to enlarge)


For some more insight, look at a chart of both LINE and LNCO. Focus on a few things, here. First, we can see a definite support between $22 and $23, which is about 25% lower than where we are now. However, that was also a time when Linn had the overhang of an SEC inquiry. Given the current, calmer circumstances, it is unlikely to see shares or units drop to that level again unless the distribution coverage ratio falls below one.

Yes, the clear uptrend from late last year to March of this year is now broken. However, Linn has been bouncing between $27 and $28 for the past month, and so we can pretty safely call that 'support.' Given the fundamental and technical situation, I believe expectations for Linn are very low right now. All Linn has to do is deliver on its own guidance, and both names will have upside.

Closing thoughts

Linn's conservative hedging strategy, acreage in premium locations and ample opportunity to improve capital efficiency makes the company a compelling choice, but not the only one, at this valuation. For a cushier coverage ratio with the same oil production profile, try Mid-Con Energy Partners (NASDAQ:MCEP) or BreitBurn (NASDAQ:BBEP). However, for long-term organic growth prospects, Linn is easily the best of the upstream MLPs. Right now, expectations are very low. Therefore, I believe that both LNCO and LINE will have significant upside if Linn can achieve just middle-of-the-road results for the next couple quarters.

Source: Linn Energy: Is This The Bottom?