Is Linn Energy An Outstanding Long-Term Play?

| About: Linn Energy, (LINEQ)

Linn Energy, LLC (LINE), founded in 2003, is an independent oil and natural-gas company. Linn engages in the acquisition and development of oil and gas properties. Its properties are mainly located in the mid- continent, the Permian basis, Michigan, California and the Williston Basin. On the 15th of December 2011, it purchased certain oil and natural-gas properties from Plains Exploration and Production Company. As of Dec, 2011, it has proven reserves of 3,370 billion cubic feet equivalent of oil, gas and natural-gas liquids.

We like LINN Energy for the following reasons:

  • 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.
  • Linn's distributions have more than doubled over the past six years.
  • It also owns significant acreage in the northeast 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 LINE's second largest operating area. This was achieved through aggressive acquisitions in 2010 and is going to be a very important driver of LINE'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 of 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.
  • It is aggressively investing in the Granite Wash area. After completing a $530 million acquisition in the area, it has already identified 600 drilling locations and plans to drill and operate 59 horizontal wells that are expected to generate returns in excess of 50%.
  • It has hedged 100% of natural-gas production at $5.45 per thousand cubic feet through 2015.
  • In January 2012, it announced a public offering of 17 million units priced at $35.95, the proceeds of which will be used to pay down its debt.
  • CEO Mark Ellis stated that Linn had been looking at several acquisition opportunities, and that they have the cash and credit facilities to do this. 2012 could turn out to be another strong year in terms of acquisitions.

Reasons to be bullish on LINN Energy, LLC :

  • A great yield of 7.2%
  • A decent levered free cash flow of 127 million
  • A good 52 week relative strength score of 61
  • A 5 year cash flow average of 2.56
  • An excellent 5 year dividend average of 9.7%
  • Net income increased from $-298 million in 2009 to $438 million in 2011
  • Cash flow increased from $3.31 in 2009 to $3.80 in 2011
  • EBITDA increased from $349 million in 2010 to $1.06 billion in 2011
  • Sales more than tripled from $273 million in 2009 to $1.16 billion in 2011
  • Operating margins of 95%
  • Good profit margins of 68%
  • An excellent quarterly revenue growth rate of 44%
  • An excellent five-year sales growth rate of 29%
  • A good interest coverage ratio of 4.20
  • A decent current ratio of 1.40
  • Year over year projected growth rates for 2012 and 2012 of 11.2% and 11.3%
  • A great 5 year sales growth rate of 32%
  • An excellent 3 year total return of 194%
  • $100K invested for 7 years would have grown to $256K

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Important facts investors should be aware of with regard to investing in MLPs:

Payout ratios are not that important when it comes to MLPs since they 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 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 $1000 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.

Company: Lin Energy LLC

Levered free cash flow = $126.47 million

Basic Key ratios

  1. Percentage Held by Insiders = 1.95
  2. Relative Strength 52 weeks = 61
  3. Dividend 5-year Growth = 3.99
  4. Cash Flow 5 -year Average = 2.56
  5. Dividend Yield 5-Year Average = 9.75

Growth

  1. Net Income ($mil) 12/2011 = 438
  2. Net Income ($mil) 12/2010 = -114
  3. Net Income ($mil) 12/2009 = -298
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 483.53
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 22.14
  1. EBITDA ($mil) 12/2011 = 1062
  2. EBITDA ($mil) 12/2010 = 349
  3. EBITDA ($mil) 12/2009 = 16
  4. Annual Net Income this Yr/ Net Income last Yr = 483.65
  5. Cash Flow ($/share) 12/2011 = 3.8
  6. Cash Flow ($/share) 12/2010 = 3.08
  7. Cash Flow ($/share) 12/2009 = 3.31
  1. Sales ($mil) 12/2011 = 1162
  2. Sales ($mil) 12/2010 = 690
  3. Sales ($mil) 12/2009 = 273
  1. Annual EPS before NRI 12/2007 = 0.78
  2. Annual EPS before NRI 12/2008 = 1.53
  3. Annual EPS before NRI 12/2009 = 1.73
  4. Annual EPS before NRI 12/2010 = 1.54
  5. Annual EPS before NRI 12/2011 = 1.79

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Dividend history

  1. Dividend Yield = 7.20
  2. Dividend Yield 5 Year Average 12/2011 = 9.75
  3. Dividend Yield 5 Year Average 09/2011 = 9.75
  4. Annual Dividend 12/2011 = 2.7
  5. Forward Yield = 7.18
  6. Dividend 5 year Growth 12/2011 = 3.99

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.53
  2. Payout Ratio 5 Year Average 12/2011 = 1.94
  3. Change in Payout Ratio = -0.41

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -4.82
  2. Next 3-5 Year Estimate EPS Growth rate = 4.9
  3. EPS Growth Quarterly(1)/Q(-3) = -134.21
  4. ROE 5 Year Average 12/2011 = 5.62
  5. Return on Investment 06/2011 = 4.88
  6. Debt/Total Cap 5 Year Average 12/2011 = 44.94
  1. Current Ratio = 1.40
  2. Current Ratio 5 Year Average = 1.9
  3. Quick Ratio = 1.26
  4. Cash Ratio = 0.68
  5. Interest Coverage =4.20

Valuation

  1. Book Value = 20.20
  2. Price/ Book = 2.00
  3. Price/ Cash Flow = 6.20
  4. Price/ Sales = 5.56

Company: Seadrill Ltd (NYSE:SDRL)

Basic Key ratios

  1. Relative Strength 52 weeks = 72

Growth

  1. Net Income ($mil) 12/2011 = 1506
  2. Net Income ($mil) 12/2010 = 1172
  3. Net Income ($mil) 12/2009 = 1261
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 18.48
  5. Quarterly Net Income this Quarterly/same Quarter year ago = -143
  1. EBITDA ($mil) 12/2011 = N/A
  2. EBITDA ($mil) 12/2010 = 2054
  3. EBITDA ($mil) 12/2009 = N/A
  4. Net Income Reported Quarterlytr ($mil) = -109
  5. Annual Net Income this Yr/ Net Income last Yr = 28.54
  6. Cash Flow ($/share) 12/2011 = 4.22
  7. Cash Flow ($/share) 12/2010 = 3.95
  8. Cash Flow ($/share) 12/2009 = N/A
  1. Sales ($mil) 12/2011 = 4192
  2. Sales ($mil) 12/2010 = 4041
  3. Sales ($mil) 12/2009 = 3254
  1. Annual EPS before NRI 12/2009 = 2.6
  2. Annual EPS before NRI 12/2010 = 2.69
  3. Annual EPS before NRI 12/2011 = 2.9

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Dividend history

  1. Dividend Yield = 8.38
  2. Annual Dividend 12/2011 = 2.89
  3. Annual Dividend 12/2010 = 1.86
  4. Forward Yield = 8.38
  5. Dividend 5 year Growth 12/2011 = N/A

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.07
  2. Payout Ratio 5 Year Average 12/2011 = 0.68
  3. Payout Ratio 5 Year Average 09/2011 = 0.68
  4. Payout Ratio 5 Year Average 06/2011 = 0.68
  5. Change in Payout Ratio = 0.39

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 2.65
  2. Next 3-5 Year Estimate EPS Growth rate = 48.32
  3. EPS Growth Quarterly(1)/Q(-3) = 101.39
  4. Return on Investment 06/2011 = 8.75
  1. Current Ratio 06/2011 = 0.73
  2. Quick Ratio = 0.73
  3. Cash Ratio = 0.46
  4. Interest Coverage Quarterly = 0.99

Valuation

  1. Book Value Quarterly = 13.48
  2. Price/ Book = 2.83
  3. Price/ Cash Flow = 9.07
  4. Price/ Sales = 4.28

Company: ArcelorMittal (NYSE:MT)

Levered Free Cash Flow = $4.32B

Basic Key ratios

  1. Percentage Held by Insiders = 0.06
  2. Relative Strength 52 weeks = 17
  3. Dividend 5-year Growth = -12.59
  4. Cash Flow 5 -year Average = 9.31
  5. Dividend Yield 5-Year Average = 2.70

Growth

  1. Net Income ($mil) 12/2011 = 2259
  2. Net Income ($mil) 12/2010 = 3005
  3. Net Income ($mil) 12/2009 = 75
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -23.37
  1. EBITDA ($mil) 12/2011 = 9294
  2. EBITDA ($mil) 12/2010 = 7829
  3. EBITDA ($mil) 12/2009 = 1020
  4. Annual Net Income this Yr/ Net Income last Yr = -24.83
  5. Cash Flow ($/share) 12/2011 = 5.04
  6. Cash Flow ($/share) 12/2010 = 4.64
  7. Cash Flow ($/share) 12/2009 = 4.88
  1. Sales ($mil) 12/2011 = 93973
  2. Sales ($mil) 12/2010 = 78025
  3. Sales ($mil) 12/2009 = 65110
  1. Annual EPS before NRI 12/2009 = 1.5
  2. Annual EPS before NRI 12/2010 = 1.68
  3. Annual EPS before NRI 12/2011 = 1.8

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Dividend history

  1. Dividend Yield = 3.60
  2. Dividend Yield 5 Year Average 12/2011 = 2.7
  3. Annual Dividend 12/2011 = 0.64
  4. Annual Dividend 12/2010 = 0.64
  5. Forward Yield = 3.79
  6. Dividend 5 year Growth 12/2011 = -12.59

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.36
  2. Payout Ratio 5 Year Average 12/2011 = 0.25
  3. Payout Ratio 5 Year Average 09/2011 = 0.25
  4. Payout Ratio 5 Year Average 06/2011 = 0.24
  5. Change in Payout Ratio = 0.11

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -54.53
  2. Next 3-5 Year Estimate EPS Growth rate = 21.29
  3. EPS Growth Quarterly(1)/Q(-3) = 152.5
  4. ROE 5 Year Average 12/2011 = 11.19
  5. Return on Investment 06/2011 = 3.66
  6. Debt/Total Cap 5 Year Average 12/2011 = 27.51
  1. Current Ratio 06/2011 = 1.5
  2. Current Ratio 5 Year Average = 1.39
  3. Quick Ratio = 0.58
  4. Cash Ratio = 0.31
  5. Interest Coverage Quarterly = 1.90

Company: Transocean Ltd (NYSE:RIG)

Basic Key ratios

  1. Percentage Held by Insiders = 0.03
  2. Relative Strength 52 weeks = 27
  3. Cash Flow 5 -year Average = 13.71
  4. Dividend Yield 5-Year Average = 0.92

Growth

  1. Net Income ($mil) 12/2011 = -5725
  2. Net Income ($mil) 12/2010 = 961
  3. Net Income ($mil) 12/2009 = 3181
  1. EBITDA ($mil) 12/2011 = 1945
  2. EBITDA ($mil) 12/2010 = 4494
  3. EBITDA ($mil) 12/2009 = 6098
  4. Cash Flow ($/share) 12/2011 = 19.45
  5. Cash Flow ($/share) 12/2010 = 14.05
  6. Cash Flow ($/share) 12/2009 = 16.73
  1. Sales ($mil) 12/2011 = 9142
  2. Sales ($mil) 12/2010 = 9576
  3. Sales ($mil) 12/2009 = 11556
  1. Annual EPS before NRI 12/2007 = 11.6
  2. Annual EPS before NRI 12/2008 = 14.34
  3. Annual EPS before NRI 12/2009 = 11.39
  4. Annual EPS before NRI 12/2010 = 5.75
  5. Annual EPS before NRI 12/2011 = 1.06

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Dividend history

  1. Dividend Yield = 6.20
  2. Dividend Yield 5 Year Average 12/2011 = 0.92
  3. Annual Dividend 12/2010 = 0
  4. Forward Yield = 6.47

Dividend sustainability

  1. Payout Ratio 06/2011 = 2.15
  2. Payout Ratio 5 Year Average 12/2011 = 0.21
  3. Change in Payout Ratio = 1.94

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -37.94
  2. Next 3-5 Year Estimate EPS Growth rate = 9.5
  3. EPS Growth Quarterly(1)/Q(-3) = 168.33
  4. ROE 5 Year Average 12/2011 = 19.17
  5. Return on Investment 06/2011 = 1.61
  6. Debt/Total Cap 5 Year Average 12/2011 = 35.87
  1. Current Ratio 06/2011 = 1.42
  2. Current Ratio 5 Year Average = 1.46
  3. Quick Ratio = 1.3
  4. Cash Ratio = 0.9
  5. Interest Coverage Quarterly = N/A

Company: Apache Corp (NYSE:APA)

Basic Key ratios

  1. Percentage Held by Insiders = 0.56
  2. Number of Institutional Sellers 12 Weeks = 5
  3. Relative Strength 52 weeks = 35
  4. Dividend 5-year Growth = 0
  5. Cash Flow 5 -year Average = 20.74
  6. Dividend Yield 5-Year Average = 0.63

Growth

  1. Net Income ($mil) 12/2011 = 4584
  2. Net Income ($mil) 12/2010 = 3032
  3. Net Income ($mil) 12/2009 = -285
  1. EBITDA ($mil) 12/2011 = 12297
  2. EBITDA ($mil) 12/2010 = 8289
  3. EBITDA ($mil) 12/2009 = 5539
  1. Cash Flow ($/share) 12/2011 = 23.36
  2. Cash Flow ($/share) 12/2010 = 17.22
  3. Cash Flow ($/share) 12/2009 = 21.05
  1. Sales ($mil) 12/2011 = 16888
  2. Sales ($mil) 12/2010 = 12092
  3. Sales ($mil) 12/2009 = 8615
  1. Annual EPS before NRI 12/2007 = 8.46
  2. Annual EPS before NRI 12/2008 = 11.61
  3. Annual EPS before NRI 12/2009 = 5.52
  4. Annual EPS before NRI 12/2010 = 8.92
  5. Annual EPS before NRI 12/2011 = 11.93

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Dividend history

  1. Dividend Yield = 0.70
  2. Dividend Yield 5 Year Average 12/2011 = 0.63
  3. Forward Yield = 0.74

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.05
  2. Payout Ratio 5 Year Average 12/2011 = 0.07
  3. Change in Payout Ratio = -0.02

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -28.46
  2. Next 3-5 Year Estimate EPS Growth rate = 6.41
  3. EPS Growth Quarterly(1)/Q(-3) = -102.44
  4. ROE 5 Year Average 12/2011 = 17.99
  5. Return on Investment 06/2011 = 13.83
  6. Debt/Total Cap 5 Year Average 12/2011 = 21.99
  1. Current Ratio 06/2011 = 0.97
  2. Current Ratio 5 Year Average = 1.41
  3. Quick Ratio = 0.84
  4. Cash Ratio = 0.22
  5. Interest Coverage Quarterly = N/A

Conclusion

Long-term investors should wait for the market to let out some more steam before committing large amount of money to this market as they are still rather overbought. A pullback in the 7%-12% from the peak would qualify as a strong pullback.

Disclaimer

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Consensus estimate analysis sourced from reuters.com.