LINN Energy LLC (NASDAQOTH:LINEQ) along with its affiliate LinnCo LLC (UNKNOWN:LNCO.DL) were my picks for 2013's top energy stocks. Excluding distributions, the oil and gas MLP was down more than 12.5% since I made that call. LinnCo fared even worse as its shares fell by nearly 17.5% on the year. What made matters worse is the market was up more than 25% over that same time. So, what went wrong?
The acquisition machine on standby
LINN Energy's growth engine is its ability to acquire mature oil and gas assets and turn them into cash-flow machines. The company started 2013 with its largest deal yet when it announced it was using LinnCo to purchase the oil-rich Berry Petroleum. At the time the deal was valued at $4.3 billion. That's more than double what LINN Energy typically spent for acquisitions in a year.
Unfortunately, the timing of that deal coincided with negative articles from Barron's and an independent research firm that caused the stock to sell off. Throughout the course of the year LINN endured several rounds of negative news, culminating in an informal SEC inquiry. Because of this it took LINN Energy and LinnCo nearly the entire year to close the Berry deal. It also cost the company another $600 million as it needed to sweeten the deal as Berry's operations improved throughout the year.
In addition to holding up the deal for Berry Petroleum, the negativity surrounding the company put its acquisition machine on standby mode all year long. In fact, LINN Energy didn't make its next acquisition attempt until September when it bought $525 worth of oily assets in the Permian Basin. LINN's only other deal news on the year was the sale of its interest in some Mid-Continent properties to Midstates Petroleum (NASDAQOTH:MPOYQ). The company bought its 40% interest in those properties in 2011, but decided not to buy out the rest of the assets when its partners put the assets up for sale. It's quite possible that if LINN wasn't enduring its firestorm it might have outbid Midstates Petroleum for control of these assets.
LINN Energy is a company that lives by acquisitions. The company closed 60 deals over the past decade totaling $15 billion. While 2013 will go down as a record year as it closed $5.5 billion worth of deals, because the Berry deal closed so late in the year it wasn't able to fuel any returns in 2013.
That's not all that went wrong in 2013
By shutting down LINN's growth pipeline the company had to rely on its organic opportunities to fuel growth. There was just one problem with that. Its top prospect to start the year, the Hogshooter formation in Oklahoma, underperformed expectations, causing the company to shift gears. That setback combined with lower than expected NGL prices and weather issues caused LINN to earn less than it paid out to investors most of the year. That only fueled the flames of those negative on the company.
It took the company all year to dig out of its early hole. The good news is that LINN Energy expects to deliver a great fourth quarter. Unfortunately, that was too little too late to move the company's stock and unit prices for the year. There's still enough uncertainty out there to hold the company's units down, despite the fact that several investors and analysts view the company as being undervalued and worth at least $40.
LINN Energy failed to deliver the returns I'd hoped in 2013. Some of that failure was LINN's fault, but a majority of it was beyond its control. That's why I think the company will begin to realize those returns in 2014. With the Berry deal now closed and most of the negativity behind it, LINN Energy is poised to restart its acquisition machine. That's why I still think it will be one of the best energy stocks in 2014.
Fool contributor Matt DiLallo owns shares of Linn Co, LLC and Linn Energy, 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.