When It Comes to LINN Energy, Patience Is a Virtue

LINN's difficult acquisition of Berry and its lack of movement on the Midland asset are still weighing on the company.

May 7, 2014 at 9:16AM

Source: LINNenergy.com

Upstream oil and gas giant LINN Energy (NASDAQ:LINE) is stuck in what could be described as a 'muddle-through' period. LINN and its financial holding entity Linn Co (NASDAQ:LNCO) were dragged through a tough acquisition campaign for Berry Petroleum last year, and both LINN and Linn Co have the battle scars to prove it. LINN had to raise its offer by about $600 million, and investors are now left with the possibility that the deal was not nearly as accretive as management would like.

Now that LINN's first-quarter results are out, showing another mediocre performance given the costs of the acquisition, it's clear that investors will need to be patient while LINN works though its many issues.

Stuck in neutral
On the surface, LINN's quarterly performance looks really good. Average daily production soared 39% to 1,104 MM cubic feet equivalent per day. Furthermore, cash from operations jumped 30% to $434 million versus the first quarter of 2013. Those numbers look fantastic, but almost all of LINN's growth was achieved through its asset acquisitions. Organic production is far less impressive. LINN expects organic production growth of just 3% to 4% in 2014.

LINN is also displaying a concerning trend of not covering its distribution with enough cash. Last year, LINN distributed $4.6 million more to investors than it generated in net cash provided by operating activities after discretionary adjustments, which include things like legal expenses and reductions for oil and gas development costs.

Unfortunately, this persisted in the first quarter as well. LINN once again came up short on covering its distribution with cash from operations. It had a $3 million shortfall of cash from operating activities after distributions and adjustments. Although, if you're looking for a silver lining, this was a much better performance than the $20 million shortfall in the first quarter of last year.

Investors getting the silent treatment
LINN's first quarter was more or less as expected. Unfortunately, it's pretty clear that the increased bid for the Berry assets has made the deal much less accretive than management had initially hoped. Fortunately, LINN still has an ace up its sleeve in the form of its Midland Basin position. But the company hasn't had much in the way of updates on what it plans to do with its prized asset.

Management has a few viable options at its disposal, which include an outright sale, an asset swap, or a full-fledged drilling program. However, for the past few quarters, management hasn't done much other than state the obvious. In the most recent quarterly earnings report, President and CEO Mark E. Ellis only said:

[W]e are pleased by the level of interest expressed in our Midland Basin properties and believe our position represents a tremendous amount of potential value for our unitholders. We are diligently evaluating a number of strategic options in order to fully maximize its value.

On the conference call with analysts, the CEO provided a little bit of color on the subject by saying the company would prefer a trade, most likely through a like-kind exchange. In addition, the company is leaning against taking on joint venture partners. Instead, management is hoping for a trade opportunity or a cash sale, and assured analysts it would announce something as soon as possible.

Patience is a virtue
Without a firm announcement, investors can really only wait and see what happens. The Midland position represents a potential gold mine for LINN and is perhaps the best hope to restore upward momentum. Completing the Berry deal was a very difficult process that is not proving to be as beneficial to unitholders as management probably would have liked.

In the meantime, investors are at least getting paid well to wait. LINN's double-digit distribution is likely not in doubt, but that could change if the company can't start covering it with operating cash flow. While I'm fairly confident a distribution cut is not a distinct possibility, it does appear that a distribution increase is probably not likely for some time, at least not until the Midland position gets monetized.

3 stock picks to ride America's energy bonanza
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