Independent oil and gas firm Linn Energy (LINE) updated its third quarter and full-year guidance. The company raised its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance to $1.365 billion from its previous guidance of $1.35 billion thanks to more drilling and positive market conditions.
Not only will the firm earn more than expected, but Linn has also exceeded several of its internal goals at a faster than anticipated rate. Its Hogshooter wells were expected to generate an average of 1,700 Bbls/day (barrels) of oil, but the wells are producing an average of 1,983 Bbls/day of oil. Total production for the third quarter will rise at least 21% to 760 MMcffe/day (thousand feet equivalent of natural gas liquids, condensate, or crude oil).
With operating costs declining and a mostly-hedged portfolio, the firm predicts a third quarter payout coverage ratio of 1.25x. As it stated during its second quarter, the quarterly payout should grow 5% during 2012. Given the company's strong asset portfolio and ability to hedge its resources at generally favorable prices, we're big fans of the firm. Though it leaves some upside on the table when it hedges production, we're big fans of the strategy since it makes cash flows much more predictable. As it relates to our dividend growth perspective, we'd rather see Linn grow its payout conservatively at 5% per annum, rather than have it spike 20% only to be cut 60% the next year, for example. With the predictability of its cash flows evident, income investors do not have to worry too much about a variable distribution, in our view.
Though we think shares of the firm are fairly valued at current levels, we're intrigued by the possibility of adding the name to the portfolio of our Dividend Growth Newsletter (please see links on our left sidebar for more information). Shares score only a 6 on the Valuentum Buying Index (our stock-selection methodology), but as we stated earlier, we really like management's conservative approach to hedging as well as the quarterly distribution. It scores a 2 on our Valuentum Dividend Cushion (click here to learn why that's important). We'd wait for a pullback in shares of Linn before we'd establish a position in our dividend growth portfolio, however.