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Credit Crunch Won't Hurt Partnerships

11/20/2007 12:00 am EST

Focus: STOCKS

Neil George

Editor, Profitable Investing

Neil George, editor of Personal Finance, says publicly traded partnerships have been unfairly caught up in the recent credit crunch and he likes one in particular.

Not many of our Portfolio stocks appear on the buy lists of the big brokerage houses. In fact, not many of them are followed, researched or even recognized by Wall Street regulars.

That’s fine by us. What good would we be doing if we simply recommended General Electric or Microsoft? We dig around to find solid, well-run companies, industry leaders that give us our cut of the profits with regular, substantial dividend payments.

[One] of our recommended groups that’s seen some volatility lately is our publicly traded partnerships (PTPs), such as Linn Energy (NASDAQ: LINE), largely because of credit market concerns.

PTPs grow by developing their oil- and natural gas-related assets or acquiring new ones. Like any business, if they’re not growing their resources, they stagnate and share prices and dividends remain static. But to achieve that growth takes cash, which PTPs typically access either by issuing bonds and partnership units or by tapping into lines of credit.

The partnership would be in real trouble if that access to credit dried up, and overblown concerns about the credit crunch seem to be causing investors to shy away. That doesn’t make much sense, though, and investors should soon realize that. The reason these partnerships work is because they own stable, cash-producing assets: most lenders are eager to write loans for a business that will continue to function regardless of what the markets are doing.

The other point to consider is that most PTPs are already well capitalized. Their credit lines were established before the recent crisis, and they have plenty of cash on the books. Even if new credit couldn’t be immediately established, they could slow down expansion projects and do just fine.

It’s been argued that the credit crunch [could cause Linn to] have trouble accessing operating cash via bank lines and have to pay huge interest costs. We’ve run the numbers on this situation, too, and stress-tested each of our favorite petrol PTPs, including Linn. If every single current creditor banged on its office doors and demanded payment on the spot, Linn could pay each dime back and much, much more.

With a current ratio just above two times and the more severe quick ratio running around 1.2x, Linn is one of the best credits in the business. (Current ratio is current assets divided by current liabilities, while the quick ratio is current assets minus inventories divided by current liabilities—Editor.) Compare it to any particular Super Oil—ExxonMobil, for example. Linn has better coverage for debt stress—nearly twice the asset and cash coverage—than the global energy behemoth.

You can swoon for the brokers’ darling, ExxonMobil and its 1.4% dividend, or you can invest in Linn and its 7.7% yield. We’re going with our PTPs. Continue to buy Linn Energy (up to $40). (It closed Monday above $25—Editor.)

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