I am currently a long LINE shareholder. How does the issuance of shares in the new company, LINCO, profit me? It would seem that LINE is diluting it's assets and the value of my shares by issuing new stock in LINCO.
As an LLC, Linn is required to distribute a considerable amount of its revenue. So it regularly sells units to raise capital. Typically, the new capital is used to pay off debt and/or buy earnings-accretive property. This occurs once or twice a year with virtually all MLP/LLCs. It's the nature of the beast. LinnCo is just a clever way of selling units while limiting subsequent price pressure on LINE. Seems to be working out so far, so don't sweat it, Sollid. LINE remains a long-term, income-producing hold with the best hedging in the business.
Every LNCO share is backed by a LINE unit. So as far as DCF they are one and the same.
The debt rating agencies were rattling their pens threatening to downgrade the debt if LINE changed their market equity cap to debt relationship any further.
This transaction restores the model of 2/3 equity value to 1/3 debt. It also clears the variable interest rate credit line. Given the up size which perhaps was a few $100 million to far with some left over.
The 'dilution' to current DCF coverage is not material given the yield on units to the actual all in cost on the credit line. However, an SO of this size does impact future DFC growth assumptions in a dramatic way but it some what counter balanced by lower borrowing debt costs. Also looking at the unit price a lower risk adjusted discount rate from the market analysts.
At this moment the recent massive natural gas acquisition are looking very prescient with ng around $3.50. The wild card is the low cost supply which may or may not come flooding out of the low cost Marcellus fields. It looks like the domestic natural gas industry finally got their house in order and are not desperately dumping gas on the market to keep their jobs.
The aspect of the business model which has allowed LINE to exploit all the Obama created economic uncertainty is the the stability of the balance sheet when combined with the long term hedging locking in cash operating margins.
So far it is neutral for valuation. But you may have a gift if the C units continue to sell at a significant discount to the units.