If you look at the past couple of years, you'll see that Linn is in a trading range rather than in a downtrend. While the units have growth potential, Linn, in terms of the income that enhances shareholder value, has done just a so-so job of realizing that, even though they're increasingly leveraged with debt. Since February, 2008 the distribution has grown by 15% in 5 years. Better than our very low inflation but nothing to write home about. However, the payout is good and the hedging strategy comforting for income investors. Linn, I expect, will continue in its range despite various analysts' targets between 43 and 46. I think of LINE as more like a bond than a stock. (I might be less sanguine if my avg. buy-in were 39 in lieu of the 29 that it is.) Anyway, it'll hit 40 or 41 again sometime in 2013, and that'll give those who had loftier expectations a chance to exit.
Linn has actually done a poor job at converting the acquisitions into distribution growth. They have averaged about 1/3 of their targeted 2 cents per unit per $100 million in acquisitions. Granted, as has been discussed at length on this board, much of that is due to Linn using the accretive cash from those transactions to plug holes in their DCF due to lower hedges resulting in lower margins.
As you mention, with the company as large as it is now, the days of heady growth are over and it becomes more of a hybid equity-bond. You won't see them growing the distribution at 10% a year anymore. 5% is about what they can manage as one must remember that there is a limit on the actual number of operations they can successfully integrate into their company platform.
I suspect this is why we are seeing them go after deals like the 2 BP deals. Those assets, while not cheap, were well maintained, came with field staff and are easier to integrate than trying to cobble 3 or 4 smaller deals into the fold. It also explains deals like the JV at Salt Creek, where Linn doesn't have to operate and thus does not have to integrate the assets into the company system.
Maybe one of the CNBC interviews from 2012 might help you get some basic info.
This is some text of one interesting interview:
"we want to talk to the ceo of linn energy. he is a man who runs what some traders consider to be the best nat gas strategist in the business. welcome to the program. thanks. how did you put yourself in such a good position to be a hedger? you are hedged 100% through 2015 on nat gas with the average price above 5 bucks so you are sitting pretty in houston. we feel good about our hedge book. this company acquires mature assets, optimizes a cash flow and returns a significant portion to unit holders. we want to make sure that the cash flow is secure and by hedging that allows us to have the stability. are you as surprised as some others are to what level nat gas has dropped and where do you see it going? the one handler is thrown around a lot. that means something with a dollar price tag in front of it. personally i'm surprised it has dipped below two dollars. our hedge book allows us to sleep well at night. a little over $5 is a nice position to be in. a significant portion of our hedge bo, 30 to 40% is in the form of put. if we were to see a price movement we would see the upside on that 30 to 40% position. on crude we also don't try to take a position in terms of crude from a standpoint of predicting prices there, either. we are hedged four years on the crude side. 100% for the next two years. at linn it is critical for us to lock in the prices. your company is on a master limited partnership. how does that differ from a typical company and does it give you an advantage in terms of things you can do tha a traditional driller can't? a little bit different about our company. they are very predictable from an operational standpoint which gives a difference. we also have a significant portion of cash flow goes out in the form of distribution that we want to make sure we lock in that price and not take that risk. by doing that it creates a fairly low cost for capital for us which allows us to be competitive on the national arena. over the last three years we 5 billion on transactions and have those hedged. we spent a fair amount of time thinking about years four, five and six out there and rolling those hedges forward so we can make sure and stabilize that cash flow well into the future. let's say you are a natural gas driller or an investor. how expensive would that be as a prospect and how would you want to do it? would you use options? swaps? what would you do? recently we did a bp billion transaction. we signed it in early march. at the time of execution on that transaction we hedged it for five years. we hedged it with a combination of swaps and puts. puts get a bit expensive but it equates to about 5 to 10% of the cost of the transaction. we put those on at the point in time when we acquire the asset. liquidity becomes a bit of an issue. thanks for spending time with us today. thank you. good to be on. mark ellis is the ceo of linn energy. this is a company, guys, that is a serial acquirer. every time you look up it seems they are doing a deal. do you buy the stock? they are more of an oil company than anything else. 60% of the sales come in the oil space. i wouldn't buy the stock where it is right here. they just did a deal. they are continuing to build up their portfolio going up doing acquisitions and certain assets. if you see them stepping out and begin to gravitate towards natural gas i think that is tell frg the natural gas space. you know what is tricky in the natural gas space is you are seeing terrible prices right now and this could go on for a year or two. one big factor is the weather. if we have a mild summer as we had a mild winter there is less demand for natural gas power. i hear a lot of optimism about nat gas in 2014 and 2015 feeling coal fire plants might be replaced with nat gas and we will be positioned better for exporting. if you can stick it out until then maybe now is a good opportunity. one of the things also is $2 seems to be a natural support level. people -- it seems to me if you are looking here and a little bit nervous you may get a bit of a not necessarily bounce but at least a hold. there seems to be the level of a bounce a little bit. i tried that $2 psychological level around 1998. it didn't work. let me throw one thing in there real quick. what if you are a nat gas producer and you take a very long term view of the world as you should, you are running a company. we haven't seen more production. so maybe they are trying to try to drive gas lower to make it look more attractive. let's take a look at the market as we head to break. it's technology that is helping us go there. there is the nasdaq. we are still in the red. you see the sizable comeback since the early morning selloff on the heels of the disappointing jobs report last week. big tech names. we mentioned how apple and price line were up already in a down take. that's a story we'll continue to follow. next it is trouble brewing for old media stocks. we are going to trade your tweets, as well.
Linn Energy CEO on Hedging Strategy
Mon 09 Apr 12 | 12:41 PM ET
Mark Ellis, Linn Energy CEO, explains why he's hedged 100% through 2015 on nat gas with the average price above $5."