Linn Energy Buying Cheap Assets From Struggling Competitors To Support Long-Term Growth

Jun. 7.12 | About: Linn Energy, (LINEQ)

In the energy sector - especially among limited partnership companies - working as a natural gas upstream producer is not the place to be. The spot price for gas has declined by 50% in just the last year - from around $5.00 MMbtu to a current value around $2.40, and well down from the $12+ rates of 2007. In spite of these fairly disastrous market conditions for its primary product, Linn Energy LLC (LINE) has been able to grow the business and increase the distribution payout to investors.

Linn Energy is an upstream natural gas upstream with increasing production of natural gas liquids - NGLs - and crude oil going into the mix. The company's business model has been to buy already producing acreage and increase production from the assets through additional drilling. Linn Energy has aggressively hedged its natural gas production and currently has natural gas production through 2017 hedged to sell at much higher prices than the current low value of natural gas. In the first quarter of 2012, Linn realized an average price of $6.33 per Mcf due to hedging, compared to an average, un-hedged market price of $3.16 per Mcf during the quarter.

Linn Energy expanded its hedging operations significantly in 2011. In February 2011 oil and gas production was hedged through 80% of 2014. By June, production hedges had been extended by a full year and by the end of 2011, the company had hedged the projected natural gas production through at least the end of 2015. In May 2012 Linn Energy reported natural gas production was hedged through 2017 and crude oil through 2015.

The result of the pricing foresight by Linn Energy is that the company is now in a position to buy up assets from struggling upstream companies at very attractive prices. In the period of December 2011 through April 2012, Linn purchased $2.3 billion worth of assets from companies like Plains Exploration (NYSE:PXP), Southwestern Energy (NYSE:SWM) and (NYSE:BP). These producing, long-lived assets will provide production and revenue to Linn for many years. As a willing buyer, Linn is able to screen potential asset buys for the best possible deals. In 2011, the company looked at 122, bid on 31 and closed 12 asset purchases.

The distribution rate from Linn Energy was stable at 63 cents per unit quarterly from the last quarter of 2007 until the second quarter of 2010 - through the financial crisis and popping of the commodity bubble. The distribution was increased to 66 cents for the third quarter of 2010, increased to 69 cents three quarters later and then up to 74 cents for the first quarter of 2012. Linn Energy does not have a fast growing dividend track record, but the growth appears to be steady and the current 7.9% yield is very attractive compared other L.P. type companies.

Linn Energy is organized as a limited liability company - LLC - instead of the more common master limited partnership - MLP. Tax benefits and reporting requirements are the same as with owning MLP units. The benefits to investors are that Linn Energy does not have general partner units earning incentive distribution rights and Linn LLC units have voting rights.

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