LinnCo (NASDAQ:LNCO) is the sister concern of Linn Energy (LINE) whose only purpose is to own Linn's units in order to distribute dividends to its shareholders. The company is structured as a C-Corporation and provides considerable tax benefits to its shareholders as it is taxed under the Form-1099 by the Internal Revenue Service [IRS]. Moreover, the company will not own any other assets besides Linn Energy's units and reserves for income taxes payable by LinnCo. Therefore, the derivation of company revenues largely depends on the performance of the underlying Linn Energy's common units. Likewise, LinnCo stock also replicates the stock movement of Linn Energy due to its underlying nature of the partnership's performance.
Our regular readers know that we are optimistic about the strategy of Linn Energy - we believe a focus on mature assets will allow the partnership to have stable cash flows. Furthermore, the exchange of mature assets for its undeveloped assets will save Linn Energy substantial amount in capital expenditures. Linn Energy and LinnCo are two of the highest yielding stocks in the energy sector with a cash distribution/dividend yield of over 10% and 9.7%, respectively. In this article, we will discuss the performance of LinnCo and its future dividend sustainability, which is solely derived from the performance of Linn Energy.
Understanding the Structure
Linn Energy and its sister concern, LinnCo, have a relatively complex structure, and the set up is different from the usual energy MLPs. Contrary to the usual MLPs, Linn Energy has no general partner which ultimately does not oblige Linn Energy to pay any Incentive Distribution Rights [IDRs] to LinnCo. Further, LinnCo is structured as a C-Corporation which is a legal structure that businesses can choose to organize in order to limit their owner's legal and financial liabilities. LinnCo has no significant assets or operations other than those related to its interest in Linn Energy.
LinnCo was created to enhance Linn Energy's ability to raise additional equity capital to easily execute its acquisitions and growth strategy. As Linn Energy continues to grow, the size of individual acquisitions it pursues and its related financing needs are expected to increase. Further, this structure will allow it to expand its investor base through the offerings of LinnCo shares, the proceeds of which will go to Linn Energy for use in executing its strategy, in return for a number of Linn Energy's common units equal to the number of LinnCo shares sold. The partnership model of LinnCo and Linn Energy is given below:
LinnCo Growth depends on Linn Energy
Linn Energy is one of the largest MLPs and independent E&P companies in the U.S, with a distribution yield of around 10%. The partnership's mission is to acquire, develop and maximize cash flows from a growing portfolio of long-lived oil and natural gas assets. As mentioned earlier, the growth of LinnCo largely depends upon the performance of Linn Energy, as appreciated cash distributions from Linn Energy will result in higher dividend distributions to the LinnCo shareholders.
Linn Energy reported increased production in different segments of the business over the last few years - the production growth for the current year is expected to be between 3-4%. This impressive growth was led by the Uinta Basin in Utah and the North Midway-Sunset in California - both these capacities are from former Berry Petroleum properties and are already optimized to the full capacity.
Linn Energy has impressive acreage over the highest yielding resources areas of the U.S. with a reserves life index of approximately 16 years. The partnership owned a total of 19,810 gross and 14,068 net oil and natural gas wells in the region, with 3,154 proved but developed drilling locations, which will increase the operational throughput of the partnership in the future. The highest yielding areas in the last year included the Rockies region which showed 105% growth, mainly due to the Berry Petroleum merger with the partnership. Moreover, the recent acquisition of $2.3 billion worth assets from Devon Energy (NYSE:DVN) has further increased the Rockies net acreage by 396,000 net acres in the region. Further, the Midcontinent region, with output of 330 MMcfe/d, showed growth of 5% compared to the last year. The recent asset acquisition from Devon and ExxonMobil (NYSE:XOM) includes considerable acreage increase in the Midcontinent region which will increase this high yielding area of the partnership.
LinnCo is required to pay the cash received, net of reserves of its income tax liability, as dividends to its shareholders. LinnCo used to pay quarterly dividends to its shareholders till May 2013, however, due to management's decision; the company has altered the dividend distribution pattern to monthly basis. Currently, the company pays around $0.2416 per share each month - $2.89 per share on annualized basis. The following image provides a summary of dividends paid by the company during the last year.
Source: SEC Filings
LinnCo's success is dependent on Linn Energy which we believe is making the right moves when it comes to shaking up the asset mix. We believe Linn Energy will be able to grow its revenues and cash flows over the next 2-3 years and the cash distributions to LinnCo will also increase. As a result, the dividends of LinnCo will likely increase along with the share price on the back of solid performance of Linn Energy. We believe LinnCo is a solid long-term investment.
Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.