Linn Energy, LLC (NASDAQ:LINE) is a rock solid dividend stock. I personally believe Linn Energy is a must own equity in an conservative diversified income portfolio. In this article I will focus upon the rationale to own Linn Energy, including recent developments within the company. Linn Energy is a dynamic entity focused upon improving the asset base to the benefit of conservative investors.
A Linn Energy, LLC shareholder knows the historical success story. The below table highlights the Linn Energy's 14% outperformance, on an annual basis, compared to the Standard & Poor's 500. This performance also assumes the Linn Energy distributions are not reinvested into additional Linn Energy shares. In addition, Linn Energy hedges their production to lock in gas and oil prices. The focus is to provide a consistent dividend to the conservative shareholder.
Linn Energy is a master limited partnership (MLP) engaged in the development and acquisition of long-life properties. Linn Energy is an upstream MLP due to the exploration and production focus. An upstream MLP operates business is at the wellhead production site. The company gathers oil production, natural gas, natural gas liquids, water, and contaminants.
Linn Energy is the major player as an energy and production (E&P) MLP. Linn Energy's market cap is $6.5 billion. Other E&P MLP's such as EV Energy Partners LP (NASDAQ:EVEP) trade with a much smaller market cap. EV Energy's market cap is $2.55 billion. Breitburn Energy Partner's (NASDAQ:BBEP) market cap is $1.05 billion. Larger E&P MLP's may have access to lower cost of capital to fund acquisitions or mergers.
I have experience on accounting and auditing aspects for wellhead production. I do not believe these folks are provided enough recognition. The accounting operations are fairly sophisticated and complex. The software and field components make the accounting doable, but it is not a simple on and off switch.
This is in contrast to a midstream MLP. Companies such as MarkWest Energy Partners LP (NYSE:MWE) and Enterprise Products Partners LP (NYSE:EPD) are prominent midstream MLP's. Midstream MLP's are typically considered safer as they charge fees on their routine duties. These duties include gathering, processing, treating, compression, and dehydration of oil, natural gas and related production.
MarkWest Energy Partners LP, Enterprise Products Partners LP, and Linn Energy, LLC all share one major attribute. All three do not have General Partner (GP) Incentive Distribution Rights (IDR). A GP IDR is a separate legal entity which skims money off the topic of net income of the operating MLP. These causes the operating MLP to have a higher cost of equity to capital. All three do not have to worry if the GP has asset drop down assets to enhance the operating business to increase dividends.
Linn Energy was founded by Michael C. Linn who serves as the Executive Chairman of the company in 2003. From then on, Linn has been rapidly developing, from the few natural gas wells it had under its name when it first started out into a company that is now publicly traded, has a multibillion dollar exploration and production with two dozen sites situated all across the United States.
Starting out from just a few employees, Linn Energy now has in excess of 700 workers. Based in Houston, Texas, the company mainly operates in the oil and natural gas production areas in the Mid-Continent, Permian Basin, Californiand Michigan.
Linn Energy develops its core modus operandi by focusing on certain important factors which are crucial for the growth of any economically thriving business.
Linn Energy puts a lot of weight onto its acquisition program which zeroes in on oil and natural gas properties that look promising in terms of life, production quality and predictable decline curves that show low risk upon developmental opportunities. These are then evaluated based on their production decline profile, estimated site specific lifespan, estimated free cash flow, and the production costs of site development. An essential part of this strategy is seeking the optimization of core assets with a long life span. Non-core assets are sold as a regular course of business. This enables the company to redeploy money into the low risk, long life and low decline oil and natural gas assets.
Linn Energy preserves a vast inventory of drilling and optimization projects so that the company is able to grow organically and opportunistically. This is done so that the assets can be operated into developing different drilling programs which can replace the high impact of production and add value through reserves and production growth. The program emphasizes on the low risk of assets. The key is to focus upon growing organically their reserves and production. The company is always on the hunt for accretive assets at opportune prices.
Rationale to Buy Linn Energy
1. Management and Acquisition Track Record
Management has provided a six year return of 15.4%, distributions not reinvested, to unit holders. The focus can be attributed to Michael C. Linn and his staff. The intent determination to purchase, maintain, and operate low risk assets provides a higher assurance dividends will increase over the years.
Production growth, for 2011, should show a net gain of 30%. This is impressive and not surprising due to acquisitions and projects.
The company has closed $850 million in acquisitions over the course of the 2011 calendar year. These assets were focused upon the Williston Basin of North Dakota, in the Permian Basin and in the Texas Panhandle petro fields. Those who have followed Mr. Linn know he acts when acquisitions are accretive and doesn't overpay. When he has the opportunity to sell assets, he takes advantage of these opportunities.
1. Granite Wash Purchase
Linn Energy closed, per this November 4th presentation, an acquisition of approximately 20,000 Granite Wash acres. The company estimates 200 low risk wells are within this purchase.
2. Distribution Growth
The company announced dividend growth by 5% in August. This equates to a 69 cent quarterly payout. This continues a trend to continue to increase the dividend. Those investors, who depend upon income, should perceive this as a raise. That is exactly what it is. As austerity is becoming common place, receiving hikes in payouts should be given appropriate recognition. My personal hat tip to Mr. Linn.
The below analysts' estimates on earnings and dividends indicate a higher share price and annual dividend. I believe this is fair to say aligns with Linn Energy management's view.
3. Zero GP IDRs
Page 23 of this Linn Energy highlights a major point. GP IDRs are enriching third parties besides shareholders in the equities themselves. The General Partners aren't going to go on CNBC or Bloomberg and announce why their returns are so profitable. MLP's are fairly new, in the broad scheme of investing. General Partner IDR's are simply not needed and enrich the selected few. Enterprise Products Partners and Linn Energy do not possess GP IDR's. Recognize the best in class and enjoy life.
4. Company Buyback of Linn Energy Shares
In the third quarter, the company announced 530,000 Linn Energy shares were purchased on the open market at an average cost of $32.76. The price has risen about 10% since this purchase was finished. Reducing the share count increases earnings per share, and future dividends.
5. Increased Hedging Pricing on Future Production
It should be noted the company also increased the hedge prices on its production goals. This will put a floor on revenues received in future quarters.
6. Organic Projects
The company has demonstrated time over time their focus upon organic growth. This has only added shareholder value as oil and natural gas reserves are updated to the financial statements. The focus upon conservative, hedged production properties is not always as lucrative as the Utica shale asset play. This asset base is currently being optimized by EV Energy Partners LP and Chesapeake Energy Corporation (NYSE:CHK). Linn Management has focused upon the income seeking investor base. This is their niche and they own it. This is a mundane business and Linn Energy confines its operations on what it knows best.
Long time Linn Energy unit holders know the success of this MLP. Management delivers on their promises and is 100% shareholder friendly. Potential investors should become familiar with the company. Very few companies truly perform to the standards expected by demanding shareholders.
If you are an investor, I strongly recommend investing in Linn Energy. The company delivers upon its promises and continues to strive to enrich shareholders.