Texas-Size Yield from Domestic Drilling

04/05/2011 12:09 pm EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Despite a generous 6.7% dividend, Linn Energy has raised plenty of cash to expand lucrative operations, writes Doug Fabian in High Monthly Income.

Linn Energy (LINE) is an independent oil- and gas-development company headquartered in Houston. The company’s market cap is a Texas-sized $6.2 billion.

Linn recently reported very strong fourth-quarter adjusted net income per unit of 43 cents, which easily bested consensus estimates. The 43 cents per share represents a 55% increase over the same quarter in 2009.

Average daily production, a metric key to energy master limited partnerships (MLPs), surged 43% year-over-year. Adjusted earnings from continuing operations—a good measure of the company’s cash flow—was up 55% year-over-year.

Linn used this strong cash flow to pay a quarterly cash distribution of 66 cents per unit, or $2.64 on an annualized basis, which equates to a powerful 6.7% yield.

One thing I really like about Linn Energy is that it’s a way to play the boom in energy prices without having to expose our capital to Middle East risk. That’s because Linn holds interests in various properties located in Oklahoma, Kansas, Louisiana, Illinois, Michigan, and California, as well as in the Permian Basin in West Texas and Southeast New Mexico.

As of December 31, the company had proven reserves of 2,597 billion cubic feet equivalent of oil, gas, and natural gas liquids, and operated 7,097 gross productive wells. In energy-MLP parlance, this means the company is super-sized.

At the end of February, Linn announced that it would make a public offering of 14 million shares to pay down debt and to raise cash to pay for a series of new oil-producing contracts.

The company further reported that it signed three purchase agreements to buy oil properties worth $434 million in the Permian Basin as well as the Williston Basin of North Dakota. Linn also will use money from the public offering to buy back outstanding senior notes.

Sound fiscal moves like this make the company an attractive investment opportunity.

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