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Linn Energy, LLC Message Board

  • thefastest123 thefastest123 Apr 27, 2010 8:29 PM Flag

    Coverage ratio>>>>1.26

    First off, don't lay into me for not knowing the answer to this question but it appears the coverage ratio has increased from 1.14 to 1.26 since last quarter. Good thing or bad? I believe it is a good indicator.

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    • The range of coverage ratio for MLPs is about 1.1 to 1.5. The higher ratio means a more secure distribution and the possibility of an increase in the distribution, but that is not all one has to consider. All MLPs hedge commodity price risk and the E&Ps such as Line, EVEP, LGCY, PSE and ENP hedge much more than the pipeline MLPS. The more annual production and the longer term the hedging, the safer the distribution. Line is 100% hedged for two years and 70% hedged for three years and is now adding hedges for the fourth year. This also contributes to the safety of the distribution. There are other factors such as the amount of drilling expenditure needed to maintain production that also need to be considered.

    • Q3 ‘08 Linn’s coverage ratio was 1.6x
      2009 year average coverage ratio of 1.14x;
      Q4 ‘09, coverage ratio of 1.04x
      Q1 ‘10 coverage ratio of 1.26x – things are slowly coming back

      Distribution Coverage Ratio. The higher the ratio the more room the company has if things turn temporarily lower to keep the distribution up.

      (Not MLP specific) A coverage ratio of less than one indicates the company is burning through more cash than it’s taking in and a dividend cut is likely. A ratio of 2 would be considered acceptable while a ratio of 3 or even 4 would be ideal.

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