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).
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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.