“This One Little Stock Could Double Your Money” Bryan Perry

By Travis Johnson, Stock Gumshoe, June 25, 2009

Here we have another pick from Bryan Perry for his 25% Cash Machine — teasing us, once again, by using the “ex dividend” date and promising that you can get 90 days worth of dividends by buying just in time!

As if this is any different from any other company that pays their shareholders once per quarter.

Today, however, his pick is a stock that I’ve considered several times this year, and had a limit buy order in to purchase … but, regretfully (so far) I’m not a current shareholder.

Or unitholder, really — since Perry teases this as a Master Limited Partnership (MLP).

So what is it? It yields about 13%, according to the teaser ad … let’s look at the clues.

“The company focuses on the development and acquisition of long life properties, with its properties currently located in California and in the Midwest.

“At the end of 2008, the company reported that its proven reserves stand at 1,660 billion cubic feet equivalent (Bcfe), which is composed of 51% natural gas, 31% oil and 18% natural gas liquids (NGL).

“What’s more, the company has more than 7,000 productive wells with the average proven reserve life of each well at—get this—approximately 21 years.

“As if that weren’t exciting enough, the company has a superior record of replacing production with new discoveries, as evidenced in their fourth-quarter financial results.

“In fact, the company replaced 282% of production and increased proved reserves by 17% in the 4th quarter. More importantly, they hedged 100% of their production for 2009, 2010 and 2011.

“This is the most attractive aspect to this company, and why your 13% dividend is so secure for the next three years!

“Today, the company is 100% hedged at weighted average prices of $102.21 per Bbl and $8.32 per million British thermal units (MMBtu) for oil and gas, respectively.

“By locking in prices that are more than twice the current price of oil and gas for the next three years, the company can comfortably pay out the stated $2.52 annual distribution, equating to a 13% yield.

“Knowing that the dividend is secure for at least the next 36 months is very reassuring to those seeking high visibility on their future dividend payments and why I’m recommending this new energy income play to your holdings NOW.”

I think that some folks might dispute the description of their Oklahoma and Texas panhandle properties as being in the “Midwest,” but this is …

Linn Energy (LINE)

It is indeed a publicly traded partnership, which means they pay out virtually all their earnings as distributions each year — actually, as is also typical, they pay out far more than what the accountants determine to be their “earnings,” like most MLPs they pay out a substantial portion of their free cash flow, which means the payouts are often classified as return of capital or something other than earnings, which means dividends can often be tax deferred (you just lower your cost basis and pay higher taxes when you sell). I am NOT a tax expert, this is just my understanding, so please don’t rely on me for anything like that — as a partnership unit holder you would get a K-1 form and a little bit of a tax and recordkeeping headache, just as you would from holding shares of other publicly traded partnerships like Kinder Morgan or Blackstone.

And yes, the salient point about Linn, and the one that got a lot of folks excited last Spring, is that they were aggressive hedgers back when oil and gas prices were still quite high — they do have hedges in place for their production for a couple years, and they’ve said that this should safeguard the distribution at the current levels (at least), meaning that, in theory, you’ll get distributions of $7 or so through 2011 almost guaranteed (they have baked in their selling prices, but they could always have production problems or higher costs on their end, or other complications that reduce the available cash). Not bad for a stock/unit that’s trading for less than $20 (it’s a bit over $19 as I type). They do carry a bit of debt, but they certainly have the steady producing assets (particularly in Oklahoma) to back that up.

The Barron’s article that brought Linn to the attention of a lot of folks when the shares were in the gutter back in December describes Linn as primarily a “plain and drab” company that’s a “yield play for older investors.” True enough by design, but the stock is also up about 50% since then.

Do keep in mind that as an MLP that is distributing cash, Linn can be thought of in some ways like a trust — it is depleting assets, so they depend on their ability to acquire inexpensive properties and find low-cost assets to produce if they’re going to maintain their profitability (and the distributions) far into the future, sort of like a Canadian Royalty Trust. The near future seems solid, but at some point in the next couple years investors will start judging the production for 2012, 2013 and so forth, so if you do decide to become a Linn investor, it’s probably wise to check in once in a while and see what they’re saying about their production levels and prospects.

Oh, and if natural gas or oil crater again, like they did over the Winter? Linn probably stands a better than even chance of falling pretty hard, too, even with those nice hedged sales in place for a couple years — so if you think energy prices are going down, you might be able to get a better price on the shares in the months ahead.

There are also several other MLP-structured energy producers that pay yields that are similar or higher, though many of them are not considered as stable as Linn, or may not have hedged as aggressively. For MLPs that are focused on upstream assets (meaning, they don’t also own pipelines or midstream stuff, they just own the actual producing wells), you can see a wide gamut from EV Energy Partners (EVEP), for example, which carries a 17% yield so you’d have to assume that investors think it’s somewhat riskier, to Pioneer Southwest (PSE), which doesn’t actually operate its assets and probably is considered somewhat more conservative with an 11% yield (that’s about all I know about them, these are just examples and I have no idea whether either is a worthwhile investment here).

I do like Linn, and the cautious nature of their management, and I regret not picking up shares last Winter when it seemed so tantalizing … It still looks interesting at a 13% yield, but I continue to hem and haw on this one. Are you interested in Linn Energy? Let us know what you think with a comment below.

And of course, if you’ve ever subscribed to the 25% Cash Machine, we’d all like to know how it worked for you — please click here to review 25% Cash Machine for your fellow Gumshoe readers.

Full disclosure: I do own shares of Kinder Morgan Management, which I mentioned briefly above. I don’t own shares of any other company mentioned, and won’t trade in any mentioned shares for at least three days.

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22 Comments on "“This One Little Stock Could Double Your Money” Bryan Perry"

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Aaron M
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Aaron M
June 25, 2009 2:19 pm

I too had a limit buy order, but it was pennies away when it started rising like crazy. I’m going to wait until it cools off again, but I keep checking it every day. Thanks for the info Gumshoe!

jerry v
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jerry v
June 25, 2009 2:20 pm
Travis; Looked into LINN also and still like it…alot, however, I bought an legitimate Aussie CBM exploration company 3-4 years ago and have held the line ever since, so I don’t mind sharing this with you and would appreciate your feed back. They are ICON Energy Limited or ICN.ax .They are in the prolific Cooper /Surat Basin. In my short (and horrific trading career), these guys are the only folks who have ever done what they say their gonna do. When you see, for yourself, what they are working on now, what its worth in 5-7 trillion cu.ft.(no typo here… Read more »
matt fox
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matt fox
June 25, 2009 2:20 pm

Linn is much like PGH and ERF, et al in that there is another very ominous risk neither he nor you mention. The risk that government’s will suddenly and without warning, hit the MLP with a tax.

The Canadians did this right after the P.M. swore he would never do it. Those MLP’s dropped thorugh the floor instantly even though their payouts didn’t change. The tax was a W/H tax at the source.

Given the new administration (Congress and Obama) constantly seeking new revenues, this could easily happen here.

matt fox
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matt fox
June 25, 2009 2:36 pm

Travis;
why are you interested in KMR when it pays no dividend and is at a P/E of 50??

David
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David
June 25, 2009 4:15 pm

linn has been in my portoflio for a while now. I am still posiitve with the stock and like the dividends. Another MLP stock that I hold is SBR. Along with some Cop stock This makes up the majority of my oil stock for long term.

Dusty
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Dusty
June 25, 2009 10:35 pm

If the Credit Suisse Market Roadmap continues to indicate the way, the price per share of Linn and others like it should drop significantly this fall and maybe even a lot more in the next two years (Market Bottom late winter, 2011-2012?) presenting an opportunity to buy a maximum position with reserved cash. Most of the pundits I read (Weiss, IDE, Sovereign Society, Whiskey & Gunpowder, The 5) keep saying the current rally is a thing of hot air, a con game.

Tom K.
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Tom K.
June 25, 2009 10:45 pm

Linn Energy was the featured stock on Cramer’s Mad Money on Wednesday, May 20th. Since then the share price has increased by about 12%. Thanks for the interesting article, Travis.

Paul H.
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Paul H.
June 26, 2009 11:18 am
I too own Linn and am happy with it. I also still own a basket of after tax Canroys. Most of these are being unfairly punished by the market. The tax implications won’t affect the majority of the trusts (or whatever business format they convert to) until well beyond 2011 because of carry forward tax credits. The income tax ramifications for after tax U.S. investors are usually nil due to the foreign tax investment credits. I own units of: AAV,HTE,PGH,PVX,and PWE. I’m holding all of them except possibly AAV because oil’s going back up, it’s just a matter of when!… Read more »
pantera
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pantera
June 27, 2009 8:31 pm

Is it necesary to file K-1 or how does this work tax wise in an IRA.thanks mark

Jerry G
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Jerry G
June 28, 2009 8:59 am
Pssssssst ya want a GREAT penny Stock ….BUY ZAGG.OB . Yes over the counter BB stock, BUT they have NO debt and are making money. Sure I want you to buy, because I have shares and want my position to increase in value! Hey , I am honest! LOL Look at the chart below and NOTE that after a 24% pullback the stock appears to advance 96% it has done this in the past…….SEE CHART BELOW. Check It out and watch it climb to $10.77 ZAGG will go NASDAQ in 60-90 days ! Nobody can say with “CERTAINTY” where ZAGG… Read more »
Gravity Switch
Admin
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June 25, 2009 2:51 pm
A good point in that there’s always some political risk, but I’d be careful not to overstate it — MLPs were a way to encourage domestic production and infrastructure, which are still needed, and the format has not been widely adopted by non-energy companies as the Canadian trust model was, so it’s not having a big impact on potential tax revenue. I think it was when Bell Canada talked about becoming an income trust that the government really panicked and realized they’d soon be out of corporate tax revenue entirely if they didn’t do something. I’d imagine that MLPs as… Read more »
bruce u.
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bruce u.
June 25, 2009 2:59 pm
right on, on your comment. the thing that is so disheartning about the CANROYS is that the guy who did the taxing was a conservative, so much for an honest politician on either side of the fence, what a lying (expletive deleted!). Do to the 2011 start of tax and the lower energy price they have never recovered as you know. Until 2011 they also have this cloud as well so are not nearly the investments that they used to be, even with the great dividends. Back to LINE-Another point, unless it is a small investment, never put a MPL… Read more »
Gravity Switch
Admin
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June 25, 2009 2:53 pm

It’s essentially a non-MLP structured version of KMP, it pays the same dividend, but in stock instead of in cash. I don’t need the income and would reinvest anyway, so this was a somewhat cheaper way to get the same thing and have a slightly smaller recordkeeping headache. Effective dividend is around 9% now, I think, though I haven’t checked it lately.

Larry Corbin
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Larry Corbin
June 25, 2009 2:57 pm

Price means nothing, timing is everything. If it is time to buy a stock, you can’t pay too much. If the time is wrong you can’t buy it cheap enough.

If the few cents difference makes it a bad trade and that is all that’s in it, forget it.

Limit orders give traders an excuse for not buying or selling a stock when proven they made a bad decision.

Gravity Switch
Admin
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June 25, 2009 3:13 pm

KMR and EEQ are the only two I know of that are “tagalongs” on the MLPs but don’t necessarily carry the same reporting/tax/IRA baggage, probably because they’re attached to two of the bigger MLP pipeline owners. There may be others, but I’ve yet to come across them. You can also buy closed end funds or the ETN for MLPs and I think those are more IRA-friendly (again, I’m not a tax lawyer), but they’ve all got their own issues, too.

Louis Aarons
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Louis Aarons
June 25, 2009 6:46 pm

Would an MLP in a Roth vs. a traditional IRA create a tax problem? I have one in a Roth & so far haven’t had a taa xissue.

theaccusersgift
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theaccusersgift
June 25, 2009 4:17 pm

Are you a penny stock shill or just inexperienced?

Fabian
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Fabian
June 25, 2009 5:52 pm

Larry is right. You want something get it! That’s for the psychology aspect. As for the technic, when you placed your limit order to buy, you told the market: here is the floor and that’s bullish. It’s like selling a put but not cashing in the price of the option.

stockcrazy10
Irregular
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stockcrazy10
June 25, 2009 7:11 pm

You should file a K-1 for all MLPs, including those held in IRA accounts.

There is no tax liability unless your total partnership earnings exceed $1000.

You can find tax information on the MLP site. Investor relations will be happy to answer your questions.

Gravity Switch
Admin
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June 26, 2009 11:03 am

Interesting — I do know that Cramer has talked this one up several times in the past couple years, but didn’t know he had also done so recently.

stockcrazy10
Irregular
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stockcrazy10
June 28, 2009 7:27 pm

You’ll still have to file a K-1, but earnings (not necessarily distributions) greater than $1000 (from all partnerships held in an IRA) are considered taxable income. (LINE Investor Relations provided the information above.)Please consult your accountant or check the MLP site for tax information. You can contact Investor Relations if you have any questions.

Kenny
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Kenny
August 31, 2009 2:08 pm

Any ticker to look for in the ETN/ETF or closed end fund space for MLP’s?

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