Raymond James: If you like Linn Energy, you should love LinnCo


Raymond James analysts clearly prefer LinnCo (LNCO +2.9%) over Linn Energy (LINE +0.5%), noting LNCO is trading at a ~$1.60 discount to LINE while also yielding ~50 bps more than LINE.

The firm says it is not clear what's keeping LNCO's valuation suppressed, other than it is taking an extended period of time to place the incremental ~95M shares issued in the Berry acquisition into a more stable investor base.

LNCO reported solid Q2 results, with production and cash flow coming in above guidance; the firm believes it should ultimately trade at a ~7% premium over LINE, given its improving distribution coverage and potential to unlock further value from its Permian Basin acreage.

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Comments (17)
  • jayridescarbon
    , contributor
    Comments (349) | Send Message
     
    My take on why LNCO has been underperforming LINE is that most think LNCO is the more appropriate choice for a retirement account, thus more retired investors in LNCO. Being more concerned with protecting principal, I see LNCO having more "weak hands."
    8 Aug 2014, 04:05 PM Reply Like
  • BAHAMAS1
    , contributor
    Comments (5091) | Send Message
     
    One reason may be that The liars at barrons didn't do any favor to LNCO over the last year with their ill-informed articles and hatchet jobs.
    8 Aug 2014, 04:43 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (3565) | Send Message
     
    LINE gets distributions, LNCO dividends.

     

    In my specific situation, here's how I see it. The shares are held in a taxable account. Assuming none of the distribution is immediately taxable, I get $2.90 from a share in LINE. My basis is reduced by $2.90 but I don't plan on ever selling. So my daughter will get a step up in basis when I die, effectively eliminating ever paying tax on the shares (at least until the basis gets reduced to 0). If instead I owned LNCO, I would get $2.32 ($2.90 - 58¢ for a 20% tax on dividends). So in my specific situation at current prices LINE yields 9.3% this year whereas LNCO only produces a net after tax yield of 7.7%. That is why I favor LINE over LNCO in taxable accounts.

     

    Were the shares held in an IRA, I would buy LNCO.
    8 Aug 2014, 05:30 PM Reply Like
  • NV_GARY
    , contributor
    Comments (6160) | Send Message
     
    Darren-
    Why then, does LNCO report all dividends as Return of Capital (box 3 of the 1099), just like LINE?
    I've seen people say they have the same benefit in a taxable account.

     

    http://bit.ly/1sYpD5a
    8 Aug 2014, 09:58 PM Reply Like
  • maybenot
    , contributor
    Comments (6491) | Send Message
     
    LNCO is great for the ol' IRA (Roth or sans). Love the monthlies.

     

    Long LNCO
    8 Aug 2014, 07:36 PM Reply Like
  • pmblass
    , contributor
    Comments (24) | Send Message
     
    The discount at which LNCO trades relative to LINE actually varies quite a bit, and the "~$1.60" is not representative. I've tracked it almost every day since March and it has averaged ~$1.10, with a high of $1.67 and a low of $0.75. Today it was $0.96, yesterday $1.63. So if you're going to switch (which was my intent) track it and wait for a good day.

     

    Also, my sense is that people who only intend to own the stock for a short time (traders) use LNCO. If, for example, the company makes an acquisition that is viewed favorably, traders pile into LNCO more than LINE, since they don't want a K1 for a company they only owned for a few days. So LNCO can be more volatile day to day.
    8 Aug 2014, 09:46 PM Reply Like
  • referrill
    , contributor
    Comments (7) | Send Message
     
    Best reply to to this post... You gave it some thought and expounded concisely - thx
    11 Aug 2014, 03:02 PM Reply Like
  • 1unchbox
    , contributor
    Comments (14) | Send Message
     
    I've long been puzzled by the LNCO / LINE disparity. Right up until the Berry deal, LNCO traded at a significant premium to LINE. Then the Berry deal flooded the market with LNCO shares, which BRY owners promptly sold, driving LNCO down relative to LINE. But that was 8 months ago... not sure why the equilibrium hasn't reset yet.
    8 Aug 2014, 11:43 PM Reply Like
  • maybenot
    , contributor
    Comments (6491) | Send Message
     
    stmeinick -- it is a bit odd.

     

    But I think pmblass's comment above brings up a possible cause or at least a partial cause. Something to consider.

     

    Long LNCO
    8 Aug 2014, 11:47 PM Reply Like
  • mayalar2012
    , contributor
    Comments (70) | Send Message
     
    I have communicated directly with investor relations of LNCO and it does report distributions as return of capital. But the percentage return of capital will depend on their accounting that they report around February.
    9 Aug 2014, 08:16 AM Reply Like
  • skyraider
    , contributor
    Comments (496) | Send Message
     
    Thanks May. For tax planning purposes I entered LNCO dividends as all qualified at 15% in my taxable account. If it is not all taxable now then I will get a small gift at tax time.
    sky
    9 Aug 2014, 11:12 AM Reply Like
  • koolsool
    , contributor
    Comments (469) | Send Message
     
    Maybe the perception is that after the BRY deal the shares of LNCO were diluted more than LINE.??
    9 Aug 2014, 08:36 AM Reply Like
  • NV_GARY
    , contributor
    Comments (6160) | Send Message
     
    SKYRAIDER-
    Your qualified dividends should have zero tax- per IRS--IF you meant you are in the 15% tax bracket (but perhaps you were saying you are in a higher bracket and will be taxed at 15% on them):

     

    Which tax rate the dividends qualify for depends on what the regular tax rate on the dividends would be. This is determined by your tax rate on earned income.

     

    Dividends qualify for the 0% rate (tax-free) if you fall within the 10% or 15% tax brackets.
    Dividends qualify for the 15% rate if you fall within most higher tax bracket, and 20% if you're in the highest tax bracket (39.6%). There are exceptions, so see IRS Publication 550 for more information.
    http://bit.ly/1vqIs2n
    9 Aug 2014, 01:46 PM Reply Like
  • skyraider
    , contributor
    Comments (496) | Send Message
     
    NV,
    Thanks for the added info. I am afraid I was not clear and for others reading this the added tax info is very helpful. In my case I was indicating that I am in the 15% rate for qualified dividends because of my regular tax rate of 25%. I can see how my choice of words, or lack of words, left room for misinterpretation.
    sky
    9 Aug 2014, 06:43 PM Reply Like
  • Bruce Faitsch
    , contributor
    Comments (201) | Send Message
     
    In my own case, I would prefer not to have a K1 to further complicate taxes. I'm also uncertain if you have to file a different State income tax other than my own for LINE. It wouldn't be worth the extra time and expense if that is true (?) for a couple hundred shares.
    10 Aug 2014, 11:22 AM Reply Like
  • BAHAMAS1
    , contributor
    Comments (5091) | Send Message
     
    barrons also recently dumped on KMI / KMP.

     

    Take a look this morning !
    11 Aug 2014, 08:31 AM Reply Like
  • threeputtwilly
    , contributor
    Comments (5) | Send Message
     
    LNCO does not appear to be well hedged against LOW oil prices. Wondering if anyone sees this differently??? I am going by post on LNCO's Investor Center called supplemental Materials... Link is

     

    http://bit.ly/1z23ZLz
    9 Feb 2015, 05:00 PM Reply Like
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