Although LINN Might Disappoint This Quarter, its Future is Extremely Bright

LINN disappointed with its fourth quarter results and may do so again this quarter. However, the company's long-term picture is extremely positive.

Apr 16, 2014 at 9:48AM
Linn Energy

By now, it's no secret that exploration and production giant LINN Energy (NASDAQ:LINE) has been roughed up over the past year. The company was dragged through a very tough acquisition last year, in which its financial holding company LinnCo (NASDAQ:LNCO) had to raise its offer for Berry Petroleum. Analysts quickly piled on in a series of downgrades in recent weeks, saying LINN overpaid. It also hasn't helped the company that the Berry assets have been slow to integrate and aren't proving to be accretive yet.

In addition, LINN's core underlying operations broadly missed expectations in the fourth quarter, and the conditions that caused those unimpressive results probably lasted through the first quarter as well. It's looking likelier with each passing week that LINN will post another disappointing quarter when the company reports first-quarter results in a few weeks.

However, investors shouldn't panic. In fact, far from it—LINN still has plenty going for it that should interest you. Here's why, although its first quarter might underwhelm, there are too many positives about LINN's long-term prospects to dismiss the company entirely.

First quarter may echo the fourth quarter
Back in February, LINN released a dud of an earnings report which sent it shares tumbling in the aftermath of the announcement. The company missed estimates on several metrics important to an upstream operator. Production came in light, and LINN swung to a wider-than-expected net loss. Management acknowledged the operating issues encountered during the fourth quarter, and blamed much of the company's miss on extremely harsh weather. Analysts also seemed disappointed in the lack of clarity over what management intends to do with LINN's prized Permian Basin assets, which it desperately wants to monetize to create value for investors.

Unfortunately, most of those conditions that resulted in a poor fourth quarter earnings report lasted into the current quarter. The brutally harsh weather that created production disruptions lasted well into April. And, management hasn't given much of an update about the Permian Basin assets, other than the available options at its disposal. This is a significant issue which management should provide further clarity on, since LINN's Midland position comprises almost two-thirds of its total Permian Basin production.

Don't miss the long-term picture
While LINN's near-term outlook is murky, the long-term prospects are extremely positive. Much of this has to do with the fundamental economics of its business. Oil and gas production continues to rise in the United States, and LINN is in the fortunate position of having a foothold in several premier areas of production. Plainly stated, its Permian Basin position is a potential goldmine.

And, LINN also has strong exposure to California, where production will accelerate going forward thanks to the newly acquired Berry assets. LINN's average production reached 6,000 barrels per day in the fourth quarter, 4,000 barrels of which were due to the Berry assets. With Berry in tow, LINN's combined production should soon hit 25,000 barrels per day, which would make it the fifth-largest producer in California.

Plus, it's not as if LINN actually performed poorly last quarter. Its results may have disappointed analysts, but LINN still generated improving metrics across the board. It grew average daily production by 11% in the fourth quarter. In addition, proved reserves jumped 34%. This resulted in quarterly operating cash flow increasing by 9%.

Last but certainly not least, let's not forget LINN's massive distribution, which is the icing on the cake. Both LINN and LinnCo offer double-digit yields thanks to their recent sell-offs. And, for investors concerned with sustainability, it's worth noting that this distribution is secured by sufficient cash flow. LINN generated $31 million in excess cash flow above what it distributed to investors in the fourth quarter. And, should production and cash flow growth prove to be better than expected, there may be room for a slight increase later this year.

Put simply, while it's easy to get caught up in short-term disappointments, Foolish investing is all about seeing past the headlines to understand the long-term prospects. When it comes to LINN, it seems that the recent hysteria and panic selling amounts to little more than an excellent buying opportunity.

Let these pipelines distribute cash into your brokerage account
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Bob Ciura owns shares of Linn Co, LLC. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers