- After holding Linn Energy off and on over the past year and a half, I bought my first shares in LinnCo recently.
- This entity has a nice earnings trajectory and also pays an almost 10% distribution yield paid monthly.
- Why I think these shares provide a solid income opportunity with attractive valuations in what I consider a slightly overvalued market.
I have made quite a bit of money over the past 12-18 months trading in and out of high yielding upstream energy partnership Linn Energy (NASDAQ:LINE). This was especially true after a couple of negative articles in Barron's last year alleging "accounting irregularities" knocked the stock down to the low $20s. This held up a pending merger with Berry Petroleum that was eventually blessed by the Federal Trade Commission.
I have been more of a trader of these shares since that significant and profitable opportunity. I have tended to buy since then on any decent dip, wait for a bounce and then sell just out of the money covered calls; collecting a better than a 9% distribution yield in monthly installments. My core stake in Linn Energy was recently called from me as the options I sold against the position expired in the money.
Rather than waiting for the next dip to redeploy these funds back into Linn Energy, I have decided to instead start accumulating shares of LinnCo (NASDAQ:LNCO). I just like this entity's combination of growth and income a bit better as both partnerships sell for just over $31 a share.
LinnCo came public in 2012 and its only asset is its ownership in Linn Energy. LinnCo allows E&P C-corp. acquisitions in a tax-efficient structure and provides a large, liquid entity with tremendous access to capital. Unlike E&P plays that are getting their production from fast growing emerging shale regions that require significant upfront costs; Linn concentrates on stable mature fields.
The company also uses hedges commodity prices significantly. 100% of projected natural gas production is fully hedged through 2017. 100% of oil production is fully hedged this year and 50% to 60% of this production is hedged in 2015 and 2016. The company via these two entities also is a serial acquirer accounting for ~50% of the $30 billion in acquisitions upstream master limited partnerships have made since 2008. In short, it is the gorilla in this space.
Growth & Valuation:
After posting significant losses in 2013, this entity is on track to post between $1.40 to $1.50 in profit per unit in 2014 with the consensus calling for over $2.50 in earnings for FY2015. The shares are not expensive at ~12 times next year's estimated earnings.
The shares yield an almost 10 percent distribution yield (9.8%) and make payments monthly. This is a bit better than Linn Energy (9.4%). Insiders own over $200 million in this entity and have not sold a share since the entity came public almost two years ago. The median price target by the six analysts that cover the entity is $36 a share.
I think the payout yield alone is worth owning the shares as I think the stock market will be hard pressed to achieve those returns given how much equities have rallied over the past five years and with the Federal Reserve finally ending a series of massive quantitative easing programs in October. Any capital appreciation on the top of LinnCo's high yield is just gravy. ACCUMULATE
Note: This type of entities have some complex tax structures and rules. Here is a link that can help understand the complexities of these entities.