By Siraj Sarwar
Linn Energy LLC (NASDAQ:LINE) is a limited partnership that develops, exploits, and generates from oil and natural gas properties. Its main assets are located in the Appalachian Basin, Mid-Continent and in California. It presently produces over 200 million cubic feet of natural gas equal per day. At the end of 2011, its reserves were standing at 3370 [bcfe]. The stock performed really well since its dip at peak of the financial crises. In the last four years, Linn returned astounding 400% capital gains to its shareholders. I think the stock still has upside potential as long as the energy prices keep its upward trend.
click to enlarge images
(Chart is sourced from company website.)
Investors are bullish on Linn Energy due to its impressive financial performance. The company reported a significant increase of 31% in its operating income. Oil, natural gas and NGL sales increased almost $45 million to $347 million.
The trailing twelve month net income reached to $879 million. This is more than double the income generated in 2011. The company also paid a net debt of more than $2 billion in the last twelve months. The dividend payments of $526 million were mostly financed through the new unit issuance worth about $791 million.
Company produced sales of $302 million in the second quarter of 2012. Oil, natural gas and NGL sales were recorded at about $696 million. Realized gains on commodity derivatives amounted to $173 million in the same period.
LINE Milestones in the 2nd Quarter:
LINE elevated adjusted EBITDA by 21 percent to $319 million from $264 million in the Q2 of 2011. Day-to-day average production improved 76 percent to 630MMcfe/d from 358MMcfe/d. Lease related operating expenses decreased by 29 percent to $1.33 per Mcfe from $1.73 per Mcfe in the Q2 of 2011. The corporation also completed three Hogshooter wells.
Linn Energy modified its third quarter and full year projections. The corporation increased its adjusted EBITDA projection to $1.365 billion from its earlier projection of $1.35 billion thanks to more drilling and positive market conditions. Not only the firm will earn more than predicted, but Linn Energy has also surpassed several of its internal objectives.
Linn Energy Hogshooter wells were estimated to produce an average of 1,700 Bbls/day (barrels) of oil. The wells are currently generating an average of 1,983 (Bbls/day) of oil, better than projections. Total generation for the Q3 will increase at least 21 percent to 760 MMcffe/day. Moreover, Linn Energy is upgrading its 2012 total generation projections to be between 660 MMcfe/d and 685 MMcfe/d.
The partnership is offering a dividend yield of 7 percent, substantially higher than the industry average of 2.15 percent. Its solid payout ratio of 60.5 percent looks sustainable. Corporation has elevated its distribution payments by more than 70 percent. Distribution payments have been increased for the past four quarters. It has a payout ratio of 60.5 percent, which even leaves lots of room to raise future distributions.
Linn Energy has a quality management, which elevated production in 2011 by 30%. Linn Energy sets a target of improving production by another 40 percent for 2012. The corporation is dedicated to adding value for its shareholder. It has estimated that its payout coverage ratio would be about 1.25x in the upcoming quarter. In its earnings release of the Q2, it declared that the corporation payout will improve around 5 percent in 2012.
Cash used in operating activities for the first half of 2012 was approximately $122 million. Company generated cash by operating activities of approximately $304 million for the six months ended June 30, 2012. The decrease is primarily due to approximately $583 million in premiums paid for commodity derivatives during the six months. Higher premiums and greater expenses were partly offset by improved revenues mainly due to better production volumes.
Premiums paid during the six months ended June 30, 2012, were for commodity derivative agreements that hedge future generation. These derivative agreements deliver the company long-term cash flow predictability to manage business, service debt and pay distributions.
Figures in million
Operating Margin %
(Table is sourced from Morningstar.com.)
Linn Energy main industry peers are Anadarko Petroleum Corp (NYSE:APC) and Pioneer Natural Resources Company (NYSE:PXD). Linn Energy has a market capitalization of 8.06 billion. Anadarko Petroleum Corp and Pioneer Natural Resources Company have a market capitalization of 34.1 billion and 12.62 billion. Linn Energy has attractive dividend yield of 7%, while APC and PXD has yield of 0.5% and 0.1%.
Linn Energy has been an excellent long run play to own. The company has one of the finest management teams in the sector. Linn Energy has a track record of spotting and landing great deals and fantastic hedge book programs.
Linn Energy has high margin and growth rate. The company has improved production by 76% in the Q2 of 2011. The company is expected to increase production by 40% in the next half of 2012. In addition, the company has one of the highest dividend yields of 7% in its industry.
Linn Energy has become eye-catching to investors. It has fascinating potential to hedge all of its oil and gas production resources at favorable prices till 2016 and 2017. The current reserves have expanded significantly at CAGR of 65 percent in the last seven years. While I expect a slowdown in the growth, I still expect double digit growth rates over the next 5 years. Prospects look bright for Linn Energy and shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.