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Basic overview

Linn Energy, LLS (NASDAQ:LINE) is an independent oil and gas company that is focused on the development and acquisition of long lived oil and gas properties based in the U.S. Its goal is to provide growth and a stable source of distributions to its unit holders via drilling and acquisitions.

Reasons why Linn is a good long term play

It distributions have more than doubled over the past six years.

Earnings have grown at an annual rate of 40% over the past five years.

The two main areas of growth for LINN are the Permian Basin and its horizontal drilling program in the Granite Wash Trend. It holds over 70,000 gross acres in the Texas panhandle area alone and another 100,000 gross acres in the Oklahoma portion of the Granite Wash. It has already identified more than 100 drilling locations in the Texas Panhandle portion of the Granite Wash. Given the pace at which it is identifying new locations, we believe that its inventory will continue to grow over the years. What makes this area even more attractive is that many of the wells produce large amounts of condensate and NGL, which commands higher prices. This makes the Granite Wash one of the most economically attractive areas in the industry.

It also owns significant acreage in the north east sections of Oklahoma and Southern Kansas. Currently, this amounts to over 800,000 gross acres (400,000 net acres). It has identified more than 1,000 high probability drilling locations. It also owns a stretch of land in the Mississippi Shelf play (260 miles long and 45 miles wide).

The Permian basin is LINN's second largest operating area. This was achieved through aggressive acquisitions in 2010 and is going to be a very important driver of LINN's future organic growth. It has roughly 400 proved oil- focused Permian Wolfberry drilling opportunities, and it holds 74MMBOe of proven reserves in the basin.

LINE increased production by 30% in 2011 and has its eyes set on increasing production by another 40% in 2012. In the fourth quarter of 2011 production rose by 38% to an average o 425 million cubic feet of gas equivalent per day. Part of this increase was the result of acquisitions. In December, it paid $600 million for oil and gas fields located in the Texas Panhandle and Oklahoma.

LINE actively hedges its production and in the fourth quarter its hedging activity generated a loss of $290 million. We feel that it's just a matter of time before natural gas prices start to trend higher. As more natural gas is exported (via LNG) prices should start to stabilize relative to the prices they command overseas. The price differential is huge, and many companies are racing to take advantage of the huge price differential between the price natural gas commands in the U.S. and what it fetches in Europe and Asia.

CEO Mark Ellis stated that Linn was looking at several acquisition opportunities, and that they have the cash and credit facilities to do this. This leads us to believe that 2012 will be another strong year in terms of acquisitions for LINE.

Additional reasons to be bullish on Linn

  1. It has a five-year dividend average of 9.50%.
  2. A very strong five-year dividend growth rate of 18%.
  3. It has a incredibly strong three-year rate return of 218%.
  4. Net income and operating cash flow exploded upward in 2011.
  5. It sports a good current ratio of 1.4 and an acceptable interest coverage ratio of 2.5.
  6. It also has a healthy levered free cash flow of almost $190 million.
  7. It has grown from just a handful of wells (natural gas) in 2003 to one of the top 20 independent U.S. oil and natural gas development companies with over 2.4TCFE in reserves.
  8. In 2009 it delivered a 100% rate of return to unit holders.
  9. It has interests in more than 9,000 producing wells across the U.S. and a huge list of inventory development opportunities that will maintain and increase production and reserves for years to come.
  10. It has a good quick ratio and current ratio of 2.26 and 1.45 respectively.
  11. It sports a strong interest coverage ratio of 13.77.
  12. 100K invested in LINE would have grown to 245K in six years.

Important facts investors should be aware in regards to investing in MLPs

Payout ratios are not that important when it comes to MLPs which generally pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

MLPs are not taxed like regular corporations because they pay out a large portion of their income to partners (as an investor you are basically a partner and are allocated units instead of shares) usually through quarterly distributions. The burden is thus shifted to the partners who are taxed at their ordinary income rates. As ordinary income tax rates of investors are typically lower than the income tax assessed on corporations, this arrangement is advantageous to the MLPs and generally most investors.

MLPs issue a Schedule K-1 to their investors. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1,000 and in some cases negative. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your units. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships. Individuals searching for other ideas might find this article to be of interest 5 Dividend Stocks With Compelling Yields.

Linn Energy LLC LINE

Industry: Production and Extraction

It has a free cash flow of $189.10M.

Performance

Total return for the past 3 years = 218.1%

Total return for the past 5 years = 49.71%

Total return for the past 12 months = 2.4%

Consecutive dividend increases = 2 years

Growth

0

Net income for the past three years:

Net Income - 2011 = $-298 million

Net Income - 2010 = $-114 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities:

2008 = $179.52 million

2009 = $426.81 million

2010 = $270.92 million

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $349

EBITDA ($mil) 12/2009 = $16

Sales ($mil) 12/2011 = $N/A

Sales ($mil) 12/2010 = $690

Sales ($mil) 12/2009 = $273

0

Dividend yield five year average = 9.50%

Dividend rate = $ 2.76

Payout ratio = 168%

Dividend growth rate 3 year avg = 2.73%

Dividend growth rate 5 year avg = 18%

Consecutive dividend increases = 3 years

Paying dividends since = 2006

Total return last 3 years = 281%

Total return last 5 years = 49.51%

Payout Ratio 12/2011 = N/A

Payout Ratio 5 Yr Avg 12/2011 = 349

Change in Payout Ratio = 16

Other Key Important Ratios

Price to Sales = N/A

Price to Book = 1.76

Price to Tangible Book = 1.76

Price to Cash Flow = 12.01

Price to Free Cash Flow = -3.9

Quick Ratio = 2.26

Current Ratio = 1.45

LT Debt to Equity = 0.84

Total Debt to Equity = 0.84

Interest Coverage = 13.77

Inventory Turnover = N/A

Asset Turnover = N/A

Related companies (Peer Group)

Quicksilver Resources, Inc. KWK

Industry: Production and Extraction

It has a free cash flow rate of $-441.01M and a current ratio of 0.52 and an interest coverage ratio of 1.93.

Net income for the past three years:

Net Income - 2011 = $-557 million

Net Income - 2010 = $435 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities:

2008 = $456.57 million

2009 = $612.31 million

2010 = $397.72 million

0

Dividend yield 5 year average = 0

Dividend rate = $ 0.00

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = None

Total return last 3 years = 4.35%

Total return last 5 years = -69.66%

Ultra Petroleum Corp. UPL

Industry: Production and Extraction

It has a free cash flow rate of $-602.63M and a current ratio of 0.42 and an interest coverage ratio of 13.08.

Net income for the past three years:

Net Income - 2011 = $-451 million

Net Income - 2010 = $464 million

Net Income - 2009 = $453 million

Total cash flow from operating activities:

2008 = $840.81 million

2009 = $592.65 million

2010 = $824.73 million

Dividend yield 5 year average = 0

Dividend rate = $ 0.00

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = None

Total return last 3 years = -32.2%

Total return last 5 years = -53.88%

W & T Offshore Inc WTI

Industry: Production and Extraction

It has a free cash flow rate of $-286.41M and a current ratio of 0.55 and an interest coverage ratio of 8.08.

Net income for the past three years:

Net Income - 2011 = $-188 million

Net Income - 2010 = $118 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities:

2008 = $882.5 million

2009 = $156.27 million

2010 = $464.78 million

Dividend yield 5 year average = 0.82

Dividend rate = $ 0.16

Dividend growth rate 3 year avg = 160.23%

Dividend growth rate 5 year avg = 7.54

Consecutive dividend increases = 0 years

Paying dividends since = 2005

Total return last 3 years = 153.2%

Total return last 5 years = -12.67%

Stone Energy Corp. SGY

Industry: Production and Extraction

It has a free cash flow rate of $-182.48M and a current ratio of 1.41 and an interest coverage ratio of 58.96.

Net income for the past three years:

Net Income - 2011 = $-218 million

Net Income - 2010 = $96 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities:

2008 = $522.48 million

2009 = $507.79 million

2010 = $424.8 million

0

Dividend yield 5 year average = 0

Dividend rate = $ 0.00

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = None

Total return last 3 years = 555.51%

Total return last 5 years = 1.59%

Conclusion

Dividend investors looking for a stock with a good yield and excellent future prospects should consider Linn Energy. The ideal entry point would be to try to purchase Linn on a re test of the 32-33 ranges. As the markets are extremely overbought, and begging for an excuse to sell off, investors would be wise to wait for a pullback before committing large sums of money to this market.

Free cash flow per share, Price and consensus, EPS and EPS surprise charts were obtained from zacks.com. Dividend history charts sourced from dividata.com.

Source: Linn Energy: A Long-Term Independent Oil And Gas Dividend Play

Additional disclosure: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.