Time to Buy This High-Yielding Energy Stock?http://www.fool.com/investing/general/2012/09/01/time-to-buy-this-high-yielding-energy-stock.aspx Arjun Sreekumar
September 1, 2012
With 10-year Treasuries yielding below 2%, investors are anxiously searching for high and sustainable yields. In the energy space, one high-yielding company should more than fulfill their expectations. It's an extremely conservatively hedged energy explorer and producer with solid exposure to high rate-of-return onshore plays. And it offers a juicy 7.4% yield.
A one-of-a-kind energy company
But Linn isn't like most energy E&Ps, for several reasons. First, the company is structured as an LLC yet taxed like a partnership. Therefore, it pays out the majority of its cash flow as tax-deferred distributions, similar to a master limited partnership. And because it lacks a general partner, like other MLPs, all investors share the growth in distributions equally.
Combining acquisitions with organic growth
Linn also has a real knack for acquiring mature, long-lived, low-decline assets at attractive prices. With so many energy companies divesting assets to raise cash, the company has found itself rolling in attractive opportunities as of late. Year-to-date, it has announced $2.8 billion in acquisitions, which is more than a quarter of the total value of the company's acquisitions since inception.
Most recently, the company scooped up acreage in Wyoming's Jonah Field from BP (NYSE: BP ) for a contract price just north of $1 billion. Fitting the company's criteria to a T, the Jonah field is a long-lived asset with a low decline rate and is expected to yield roughly 145 million cubic feet equivalent per day. Current proved reserves total roughly 730 billion cubic feet equivalent, but the company estimates the total resource potential to be closer to 1.2 trillion cubic feet equivalent.
Still, you may find yourself skeptical on the grounds that acquisition-driven growth is inorganic. After all, in just the past six years, the company has acquired more than $8 billion in assets. While it's true that acquisitions have been a major force in driving the company's success, organic growth has been a key driver as well. A couple of key points that may assuage concerns is that last year, organic growth in production was 40% and the company is expecting more than 20% this year.
For instance, another large E&P, Penn West Petroleum (NYSE: PWE ) , boasts a dividend yield of 7.6%. But its dividend may be in serious jeopardy, with a payout ratio approaching 140%. To keep up its payments to investors, the company is contemplating massive asset sales to the tune of $1 billion. And they're not alone.
Enerplus (NYSE: ERF ) , a Canadian oil and gas drilling and exploration company, is also having trouble servicing its dividend payments. Even after recently reducing its payout by half, its current dividend of 6.8% may have to be lowered further. The company's quarterly losses are worsening, and its free cash flow is now in negative territory.
Linn, on the other hand, has a solid track record