Since 2013 the MLP Linn Energy (NASDAQ:LINE) and its dividend-paying equivalent Linn Co. (NASDAQ:LNCO) have come under heavy attack by Hedgeye, an investment-advisory firm which has been arguing that the partnership has been funding its distribution through debt -- the partnership, like many MLPs, has negative free cash flow. These allegations resulted in a negative article in Barron's magazine (which rehashed the Hedgeye allegations) as well as an informal SEC inquiry into its accounting methods, resulting in a 20% decline in Linn Co. shares.
This decline in share price caused the price of Linn Energy's most recent acquisition, Berry Petroleum, to increase in price by 34%, since Linn Co. used its shares to fund the acquisition. The extra cost threatened the accretive nature of the purchase, and when management announced distribution coverage guidance of 1.0 for 2014, due to increased maintenance capital costs for new Berry Petroleum resources and the higher purchase price, Wall Street became concerned about the safety of the distribution.
In a previous article, I argued that these concerns were short-sighted and overblown and that they ignored important growth catalysts that would secure the current distribution. LINE yields 10.2% and LNCO yields 10.4%, and the partnership was trading at a 23% discount to the future value of its oil/gas reserves. Linn Energy's most recent quarter confirms these investment hypotheses, so long-term income investors should still consider Linn Energy for their income portfolios.
Solid quarter, solid growth plan
The most recent quarter's financial results support continued confidence in management's growth strategy:
- Revenue growth of 98%
- Production increase of 39%, including a 50% increase in the Rockies, 52% in east Texas, 108% in the Permian basin, and a stunning 1,176% increase in California
- Distribution coverage fell to .99 for a $3 million shortfall for $240 million in paid distributions
- Increased transportation expenses of 21% per Mcfe, or million cubic feet of natural gas equivalent
- Slight decreases in midland (-7%) and Michigan/Illinois assets (-4%)
- Guidance for 2014 distributable cashflow, or DCF, down $29 million (from a $12 million surplus to a $17 million deficit)
Linn Energy's management team has grown the operation into the largest upstream MLP in America, with a 2,500% enterprise value increase in just eight years. Through a consistent history of accretive acquisitions and wise use of investor capital, the partnership has been able to grow its generous distribution by a 4% CAGR since 2007. It has never had to cut the distribution, not even during the financial crises. Given management's track record and solid growth plan, long-term income investors can be confident in both the safety of the current distribution/dividend and the long-term growth prospects for steadily increasing income.
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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy Partners. 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.