With a nifty IPO this last week, Linn Energy LLC (LINE) raised over $1 billion in working capital to continue the company's history of acquisition and at the same time offered investors a different avenue for investing in the company.
The new company, LinnCo, LLC (LNCO) is a subsidiary of Linn Energy, which will file and be taxed at the corporate level. The assets of LinnCo consist of 13% of the Linn Energy LLC units with each LinnCo share backed by one Linn Energy unit. It is expected that the tax benefits from the LINE distribution pass through will result in taxes at the company level of 2% to 5% of the distributions received. Shareholders of LinnCo will receive a 1099 for the dividends paid instead of the K-1 that is sent out to unit holders of Linn Energy.
Linn Energy is an upstream natural gas and crude oil producer. The MLP/LLC company's business model involves the purchase of producing oil and gas properties, working those properties for more production and taking out long-term (4 to 5 year) hedges to protect the cash flow from the energy production. Over the last three years, the company has spent $5.7 billion on new assets, including $2.8 billion in 2012. Growth since the 2006 IPO of Linn Energy has been fairly evenly balanced between the issue of new equity and the sale of bonds. The LinnCo IPO just added about $1.2 billion to the equity side. Linn Energy is by far the largest upstream MLP, with an enterprise value equal to the next eight competitors combined.
The result for investors has been a high distribution yield with steady payout increases. During the steep drop in natural gas prices after 2008, Linn Energy keep the distribution rate level through the middle of 2010. Since the 2010 third quarter the quarterly distribution has been increased every three quarters.
LINE vs. LNCO
The current 72.5 cent quarterly distribution from Linn Energy gives the LLC units a 7.15% yield. The distributions from partnership units include a pass through of expenses and depreciation, so a significant portion of the earnings would be currently tax-free - there is a write-off recapture when units are sold. The K-1 reporting system involves more extensive tax filing paperwork and state income tax returns may need to be filed in the states where Linn Energy does business.
LinnCo is projected to pay a $2.80 annual dividend or 70 cents quarterly. The shares closed at $38.26 on Friday, giving the new stock a 7.3% initial yield. The dividends from LinnCo will be 1099 earnings and qualified for tax purposes - for as long as qualified means something. LinnCo dividends should increase penny for penny with any increased payouts from Linn Energy.
Which to Own?
It is my opinion that Linn Energy is one of the top MLP investments. The distribution yield is very attractive and the company is aggressively growing its business. The new LinnCo version offers the same qualities to investors who want to avoid the whole K-1 route. LNCO would be the better choice for qualified plans such as IRAs. It will be very interesting to see where the market ends up pricing the two different Linn share types - MLP or 1099 taxable.
Additional Recommended Reading: Linn Energy Buying Cheap Assets From Struggling Competitors To Support Long-Term Growth
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.