LINN Energy (NASDAQOTH:LINEQ) and its affiliate LinnCo (UNKNOWN:LNCO.DL) issued a press release noting that the pair anticipates issuing an earnings press release after markets close on Oct. 28. The language of this release was very peculiar, and the company didn't schedule a quarterly conference call with analysts. The lack of clear information is of course leaving room for speculation that what the company has to say could be bad news. So, what should investors watch for when LINN Energy and LinnCo do finally report?
At this point, the only thing investors really want to know is if the Berry Petroleum (UNKNOWN:UNKNOWN) merger is ever going to happen. We know that on Oct. 22 LINN Energy and LinnCo filed the fifth amended Form S-4 with the SEC. Berry Petroleum didn't have a whole lot to say about the deal when it reported earnings other than a note in its quarterly report that any of the three companies can walk away from the merger after Oct. 31.
News on the merger, whether good or bad, will overshadow anything LINN Energy has to say about its operations. At this point the deal could go either way, so be prepared for volatility. In this case no news on the deal will likely be considered bad news by the market.
What investors will need to keep in mind is that LINN Energy has a lot more to offer than just the upside from bringing Berry Petroleum into the fold. While its operations struggled earlier this year, the company is projecting a solid third quarter.
LINN Energy is projecting production to be between 810-830 million cubic feet equivalent per day, or MMcfe/d in the quarter. Hitting that number puts it on pace to hit 850 MMcfe/d by the fourth quarter, which would represent production growth of about 7% for the year. Missing those estimates wouldn't sit well with the market.
The other number to keep an eye on is how close LINN came to covering its distribution in the quarter. As of last quarter the company expected that its cash flow would cover just 87% of its distribution. Further, the company expects to cover 95% of its distribution next quarter. LINN will need to demonstrate to investors that it does have a plan to more than cover its dividend in the future.
If the merger between LINN Energy, LinnCo, and Berry Petroleum does fall through it will take LINN and LinnCo some time to recover. While it would not be the end of the world for LINN, failure here would cause investors to lose faith in both the company and its management team. That being said, LINN had a solid future before it ever set eyes on Berry Petroleum, and it would still have a future without Berry. It would simply take investors a long time to adjust to a new reality.
That's why investors should try to focus on two key numbers when LINN reports: its daily oil and gas production and how much cash its producing in reference to how much it pays out in its distribution. These are the two metrics that are key to its long-term performance.
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Fool contributor Matt DiLallo owns shares of Linn Energy, LLC and Linn Co, LLC. Matt DiLallo has the following options: short November 2013 $25 puts on 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.