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Linn Energy, LLC Message Board

  • ruby.thedyke ruby.thedyke Dec 12, 2013 10:04 PM Flag

    Post closing headwind

    Looking at BRY, and who owns the stock (almost all institutions), it seems to me two things are fairly certain. First, the vote is a foregone conclusion. But second, it strikes me that after the deal has closed, you're going to see a lot of LNCO shares in the hands of willing sellers. LNCO isn't really a security those guys want to hold, it's a retail stock. They can't sell BRY right now, except to each other, but when all those LNCO shares are transferred, it could take a couple of months just for the deck to shuffle.

    I read that as meaning we shouldn't get too excited for the early part of 2014, it may take until the end of Q2 before we really take a stab at attacking the mid $30's. I do expect that we'll FINALLY get free of this $29 tar baby, but I could see this trading at $31-32 as late as March. Whattya think?

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    • Interesting thoughts. You might be right that the institutional holders of BRY will not be interested in holding the LNCO shares they get in the merger. The assumption would be that they don't want the 10%+/- yield and moderate growth prospects inherent in LNCO. There should, however, be a ready market for LNCO shares post-merger among other funds/institutions that like the LNCO income/growth proposition.
      I think one very big clinker in the mix is the trend in interest rates. The 10-year Treasury has gone from 1.663% in April to 2.877% today...with every likelihood of going to 3.25% to 3.5% by QII-2014 (unless the Federal Reserve clearly keeps its quantitative easing policy firmly in place...which is doubtful). That would be a 37 to 62 basis point move up in the 10-year yield. If, other things being equal, the LNCO - 10-year Treasury spread remains at the current 6.79% (9.67% - 2.877%) and the 10-year rate goes to 3.5% (where it was in April, 2011), the market-demanded yield on LNCO would move to 10.29%...pushing LNCO's price down to $28.18. If the dividend on LNCO goes to $3.10, a 10.29% yield expectation prices it at $30.12.
      A scary scenario...but other things aren't equal. Production can increase and it will. Energy prices could improve above hedged prices, more mergers are in the future (hopefully accretive), etc.
      The main point is this: interest rates are very important in shaping the price of LNCO and all high yield investments, as well as all businesses that rely heavily on capital markets.
      I had long thought that LINE/LNCO would soar to $34-38 after the merger...I now agree that it might take a while to get there, especially if rates go as I expect.

      • 2 Replies to fredrickson01
      • I don't think the rate rise is a problem, remember when you could get 5% in your Fidelity government fund? Look at what LINE was yielding back then (say, late 2007. early 2008). The distribution was about $2.50 and the price was $30-40, before things started coming apart. The unit price plunged when rates did (but so did everything else!).

      • One additional thought. LNCO's yield is currently inflated because of a higher than normal level of lingering uncertainty in the market. After the merger is closed, a clear indication that the SEC stuff is finished once and for all, another robust quarter, strong 2014 guidance (in February?), and adistribution/dividend increase above expectations, the $34-38 might be more achievable.

    • Very reasonable assumptions, and I would not be surprised. If they keep the distribution around the $2.90 to $3.08 range, a 10% yield is not crazy at all, and that has them around the levels you are describing.

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