Should LINN Energy Grow Its Dividend?

Last week LINN Energy (NASDAQOTH: LINEQ  ) and its publicly traded subsidiary LinnCo (UNKNOWN: LNCO.DL  ) both announced fourth-quarter distributions to investors. In both cases the companies announced static payouts from last quarter. While that stability is nice, given that most of us took a pay cut this year thanks to higher taxes, are the companies likely to give investors a raise this year? 

Dividend history
Since 2006 LINN Energy has grown its distribution to investors from $1.60 annually to its present annual rate rate of $2.90. That's an astounding 81% increase over the past few years. What's even more impressive is that while many other companies slashed investor payouts during the depths of the credit crisis, LINN was able to maintain stability through the crisis. 

After 10-consecutive quarters of stability during the crisis, LINN then raised its distribution three times since 2010. It has averaged about a 5% boost every three quarters. Unfortunately for investors hoping for another raise, the most recently announced payout represents the fourth-consecutive static payout. 

It's time for a raise!
I think that investors should expect a raise before the end of the year and more likely sooner than later. Last quarter the company achieved a distribution coverage ratio of 1.4 times, well above its guidance of 1.25 times. For the full year it anticipated to have a coverage ratio of 1.1 times after hitting a bump in the second quarter due to significantly lower than expected natural gas liquid pricing. I believe that if the ratio remains above 1.1 times, an increase in the distribution is likely to follow.

LINN was very active in 2012; it acquired $2.8 billion of mature oil and natural gas properties. Investors should expect the company to acquire at least that much in 2013, if not more, now that it has LinnCo as another vehicle to access the capital markets. These acquisitions are one of the keys to its ability to boost the payout.

Last year for example, LINN spent $2.225 billion in two separate deals with oil giant BP (NYSE: BP  ) . Each time LINN acquired assets that were immediately accretive to distributable cash flow per unit. Not only that but each acquisition came with upside from future drilling locations as well as recompletion opportunities. In one of the deals, the Hugoton field in Kansas, LINN also acquired 100% ownership of the Jayhawk Gas Plant which at the time of the deal was only utilizing 41% of its processing capacity. As LINN utilizes more of Jayhawk's capacity and invests in these opportunities, it'll generate even more cash.

Even more upside was acquired in LINN's Salt Creek joint venture with Anadarko (NYSE: APC  ) . The deal was not only immediately accretive to distributable cash flow, but LINN gained access to a unique, high-growth asset with a low rate of decline. The company is also gaining valuable education from Anadarko on enhanced oil recovery, which should help the company to get more oil out of its own assets. The deal is another example of how LINN has done an excellent job acquiring assets that boost its cash flow, giving it future upside. It's only a matter of time before that extra income makes its way back to investors.

My Foolish take
After an excellent 2012, investors in both LINN Energy and LinnCo should expect even more in 2013. Not only do I expect more asset acquisitions but I also expect to see a payout increase in the very near future. For now, enjoy the stable payout from both LINN and LinnCo.

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  • Report this Comment On February 02, 2013, at 2:45 PM, okiedivot wrote:

    No thanks on the dividend increase. Use the capital to compete the acquisitions. I can live with 7.5% for now.

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9/30/2016 11:25 AM
LINEQ $0.05 Down +0.00 -4.20%
Linn Energy, LLC CAPS Rating: **
APC $63.40 Up +0.82 +1.32%
Anadarko Petroleum CAPS Rating: ****
BP $35.29 Up +0.23 +0.66%
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LNCO.DL $0.05 Down +0.00 -3.88%
Linn Co, LLC CAPS Rating: ***