With Linn Energy
Here comes the science
Revenues haven't been steady since the company went public in 2006. The top line has recovered well since a 2009 slump, which was due to the drastic fall in oil prices during the recession. Fools should note that Linn has been unable to convert revenues into net income, but given the current state of the global energy market, I don't see any reason that Linn won't be able to maintain its momentum.
With acquisitions worth $3 billion in its kitty and total reserves of up to 2.6 trillion cubic feet equivalent (Tcfe) at the end of 2010, the company faces high expectations to deliver. Since this is a relatively new company, a large amount of debt need not be taken as a complete negative. But with long-term debt of $2.7 billion on its balance sheet, Linn must ramp up production to justify this figure.
There are a few things I find attractive about Linn. EBITDA, the margin of cash income, stands at an impressive 64%. Linn is comfortably meeting its interest expenses, with a healthy EBITDA-to-interest expense ratio of 2.3. And the stock has been outperforming the market consistently for most of the past year. I think investors will start seeing some of the company's revenue trickling down into net income.
As for valuation, the consensus estimate on the two-year forward P/E is 16.7, while competitors Anadarko Petroleum
A Foolish bottom line
Despite the issues I'm seeing here, I do foresee positive changes in these figures, by virtue of Linn's oil reserves alone. Its free cash flow reserves stood at an impressive $197 million at the end of 2010. That's a vast improvement from $38 million the year before, and it reflects the company's improving financial position. With the current strong run in oil prices, this company looks pretty good in the long term.
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Fool contributor Isac Simon owns no shares of any of the companies mentioned in this article.
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