Linn Energy Presents A New Breed of Oil and Gas Income Stock

Adding the units of Linn Energy, LLC (LINE) to our coverage, we calculate a tentative McDep Ratio moderately above 1.0 for a stock that offers high income distributions primarily from longlife natural gas production. The valuation is tentative because there is little operating history for newly acquired properties that account for most of the company’s assets.

A recently completed acquisition of natural gas properties for $2 billion from Dominion Resources, the electric utility, seems well-timed as the price of the clean fuel appears depressed relative to oil. Linn is a leader by market capitalization in the newly expanding oil and gas production income category of U.S. Master Limited Partnerships (MLPs). The LLC – Limited Liability Corporation – structure is similar to the MLP structure and we think it is important that the general partner of Linn does not have the undesirable compensation scheme of our sell-recommended MLP.

An early indication that Linn’s distribution may be partly financed by debt causes us to be cautious before drawing a firmer conclusion on the outlook for the stock.

Natural Gas Looks Timely – Again

It is exhilarating to see how well oil has done as a commodity in recent years and it is humbling to see that natural gas price is at steep discount to oil. Not knowing whether one or the other is going to do better next, long-time investors may keep representation in both fuels. Linn shares a natural gas concentration with our buy-recommendations Hugoton Royalty Trust (HGT) and San Juan Basin Royalty Trust (SJT).

LINE 1-yr chart:

Originally published on October 5, 2007.