Hard to understand why so much panic over distribution. Present distribution coverage ratio is .89x which seems to be at the low end of future expectations. So if the yield is 11.5%, they could cut the dividend to yield 10.5% and raise the distribution coverage to above 100%. Is that such a big deal to cause the stock price to be down 50%?
thomasturner999's assessment is a good attempt to lay out the right pieces of the puzzle. Lots of people will differ with the relative importance of each piece and with the likelihood that it will materialize. The correct long case, in my opinion, is that LINE will keep the $2.90 distribution even if BRY merger doesn't happen (and I think there's a very good likelihood that it will happen). Just for analysis, assuming no BRY deal, I believe that LINE's IQ and IIQ and IIIQ drilling and productivity enhancement programs will yield improved production and revenues sufficient to cover the $2.90 in IVQ 2013 or at least in IQ2014. As thomasturner said, Linn Energy hit a rough patch with several things working against them.. ethane pricing/rejection, some misses on oil drilling bets, the hedgeye attack, and the inquiry be the SEC (expected, in my opinion, because of the unconventional moving parts in the BRY merger and the public ruckus stirred up by short interests.) Even IF (a very big if) LINE adjusted the distribution by a few percent, I think the market would breath a sigh of relief after all the dust settles (as it will eventually) and sees that Linn is well-managed and following a good long-term strategic program of carefully reasoned acquisition, development, enhancement, and hedge-protection of prices. My worst case scenario has the price per unit in the $32 range with a $2.90 distribution and da 9% yield...Even with moving the $2.90 distribution and the yield percentage around a bit, you still get a market price per unit in the $30-34 range. Disclosure: I'm quite long and added at $24.60 today. With the BRY deal, count on a $3.08 distribution and a price per unit of $33-36.
There is more to it than that. The company only controls its distribution, not its yield - the market decides what it should yield. The company is paying 2.90 per year right now. The market USED TO bid up Linn units so that the yield was 8% or even less. That gets you a $36 unit price. But the company was on a roll and could give people comfort that there would be future growth in distributions. But now the company has hit a rough patch (drilling results, NGL price weakness) with coverage around 0.9x. So if Linn, as you suggest, cuts the dividend 10% to get full coverage, that takes them to paying out 2.61 per year. AND now that Linn doesn't have the halo around them that they used to (no longer an industry darling or do-no-wrong), the market might rationally decide the units should trade at a more typical 10% yield. And that would be a $26.10 unit price. That gets you MOST of the way to what has happened. Then throw in a marvelously planned and executed bear raid along with some media and SEC help, and you have what is LIKELY an overshoot to the downside on the unit price. Bottom line is that Linn might be a $26 stock without Berry but looks a lot better WITH Berry - but the Berry deal can't happen without the SEC approving the S4 and then some recovery in the Linn and LinnCo unit prices. Even then they might have to sweeten the terms for Berry shareholders.
So the point is if they had to cut the distribution 10%, that is no big deal. There appears to be no 50% cut needed, even in the worst case. I agree that it is very likely they can ride this out and not have to cut at all, if their revenue increases slightly next year.
Great summary of where we've been and where we are now. Now to the future that no one knows. Will Line pull through with renewed drilling success or fall flat on it's face as a successful exploratory company?
I agree completely with your analysis. I have tried to get to a LINE value of $30 without BRY, as mentioned by several posters, but I just cannot get there. I have bought LINE between $24 and $25 in the last week and I am hoping for a value of $27 without BRY but even that could be a stretch.
I think whether or not the merger takes place will have a very big effect on unit price. If it happens, longs will party!