Independent oil & gas producer Linn Energy (LINE +0.00%) struck impressive operating revenues this past quarter despite some messy losses from hedging. But its future plays could mean a real gusher for investors.
Drilling into the numbers
Oil and gas revenues for the quarter rang in at $444 million, a 54% increase over the same quarter last year. These lofty production numbers were severely hampered by the $411 million loss it took on derivatives it had in place to hedge against oil prices. Net income for the quarter landed at $430 million, a $2.18 loss per share. The management team gave no indication during its conference call that they were too concerned about the hedging losses during the quarter. These one-time losses will not adversely affect the bottom line of the company going forward.
During the earnings conference call on Oct. 25, Linn Energy's CEO Mark Ellis commented on the $990 million acquisition of the Green River Basin natural gas properties from BP America (BP +1.21%). This was Linn's fifth major acquisition in 2012, bringing the total spent on new properties to $3.1 billion. This could be the start, though, as they believe that $20 billion to $30 billion of properties will be on the market in the next 18 months.
What a Fool believes
The recent shopping spree by Linn hints that the company perceives a more lucrative natural gas market in the future. It appears, though, that Linn is looking to take advantage of several other gas companies who want to divest. Those major acquisitions over the past year and the seven acquisitions from 2011 add a considerable amount of debt to the balance sheet. If natural gas prices pick up, though, Linn could be riding these new proven reserves all the way to the bank.
What should really intrigue investors is Linn's monster dividend. Current shares receive a 7.1% distribution yield (it's not a dividend because Linn is an LLC). The only major oil & gas company that even comes close to this level is French giant Total SA (TOT +0.00%), yet Total's dividend is still less than Linn's by 2 percentage points.
|
Company |
Avg. 5-Year Growth Estimate |
Dividend Yield |
Payout Ratio |
|
Linn Energy |
7% |
7.1% |
59% |
|
ExxonMobil (XOM +1.86%) |
6.33% |
2.5% |
21% |
|
Chespeake Energy (CHK +0.00%) |
7.25% |
1.7% |
9% |
|
Total SA |
4.9% |
5% |
41% |
Source: Yahoo! Finance.
The payout ratio for Linn does look scary at first glance, but keep in mind that the company does not participate in exploration. Rather, they acquire known or proven reserves and milk the well for everything it has. This certainly lowers risk, but it does saddle them with a high debt burden from so many acquisitions. Increased revenue from the new fields should tamper debt levels. I would keep a sharp eye on its debt levels, but Linn has positioned itself well, and that strong dividend makes Linn look like a buy. I will be placing an outperform rating on the company on CAPS to keep me honest.
