Forget Linn’s Earnings -- Look at All Those Acquisitions

Independent oil & gas producer Linn Energy (Nasdaq: LINE  ) struck impressive operating revenues this past quarter despite some messy losses from hedging. But its future plays could mean a real gusher for investors.

Drilling into the numbers
Oil and gas revenues for the quarter rang in at $444 million, a 54% increase over the same quarter last year. These lofty production numbers were severely hampered by the $411 million loss it took on derivatives it had in place to hedge against oil prices. Net income for the quarter landed at $430 million, a $2.18 loss per share. The management team gave no indication during its conference call that they were too concerned about the hedging losses during the quarter. These one-time losses will not adversely affect the bottom line of the company going forward.

During the earnings conference call on Oct. 25, Linn Energy's CEO Mark Ellis commented on the $990 million acquisition of the Green River Basin natural gas properties from BP America (NYSE: BP  ) . This was Linn's fifth major acquisition in 2012, bringing the total spent on new properties to $3.1 billion. This could be the start, though, as they believe that $20 billion to $30 billion of properties will be on the market in the next 18 months.

What a Fool believes
The recent shopping spree by Linn hints that the company perceives a more lucrative natural gas market in the future. It appears, though, that Linn is looking to take advantage of several other gas companies who want to divest. Those major acquisitions over the past year and the seven acquisitions from 2011 add a considerable amount of debt to the balance sheet. If natural gas prices pick up, though, Linn could be riding these new proven reserves all the way to the bank. 

What should really intrigue investors is Linn's monster dividend.  Current shares receive a 7.1% distribution yield (it's not a dividend because Linn is an LLC). The only major oil & gas company that even comes close to this level is French giant Total SA (NYSE: TOT  ) , yet Total's dividend is still less than Linn's by 2 percentage points.

Company

Avg. 5-Year Growth Estimate

Dividend Yield

Payout Ratio

Linn Energy

7%

7.1%

59%

ExxonMobil (NYSE: XOM  )

6.33%

2.5%

21%

Chespeake Energy (NYSE: CHK  )

7.25%

1.7%

9%

Total SA

4.9%

5%

41%

Source: Yahoo! Finance.

The payout ratio for Linn does look scary at first glance, but keep in mind that the company does not participate in exploration.  Rather, they acquire known or proven reserves and milk the well for everything it has. This certainly lowers risk, but it does saddle them with a high debt burden from so many acquisitions. Increased revenue from the new fields should tamper debt levels. I would keep a sharp eye on its debt levels, but Linn has positioned itself well, and that strong dividend makes Linn look like a buy. I will be placing an outperform rating on the company on CAPS to keep me honest.

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Fool contributor Tyler Crowe has no positions in the stocks mentioned above.You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool

The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2012, at 11:28 PM, mr091468 wrote:

    Quote from article: "Net income for the quarter landed at $430 million, a $2.18 loss per share." Please have the writer explain this comment.

    BTW, could CHK be an acquisition target of LINN?

  • Report this Comment On November 01, 2012, at 1:14 AM, mcculdr wrote:

    How are LLC distributions taxed?

  • Report this Comment On November 05, 2012, at 2:28 PM, TMFDirtyBird wrote:

    @ mr091468

    That was a mistake,, it should be -$430 million, thanks for pointing it out.

    @ mcculdr

    Partnerships or LLC's are considered pass-through entities. This means the the company does not pay taxes, but instead all distriutions to shareholders are taxed as the income of the company.

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