Income investors and MLPs go together like peanut butter and jelly. A company receiving tax benefits in exchange for distributing the lion’s share of earnings as a dividend sounds like a good deal to me. Master limited partnerships provide some of the healthiest and most stable dividends north of 5%. When I see MLPs that are highly rated on CAPS and are trading in a range well removed from 52-week highs, I know I might be looking at a great investment.
A couple of companies currently fitting that description are Linn Energy LLC (NASDAQ:LINE), LinnCo LLC (NASDAQ:LNCO), and BreitBurn Energy Partners L.P. (NASDAQ:BBEP). As is the case with the majority of companies allowed to structure themselves as MLPs, these three companies are in the business of oil and natural gas. Let’s stack these three enterprises up side by side, look at them closely, and see if any of them are in a place we should be deploying our hard-earned capital.
Operations breakdown
1) LinnCo LLC (NASDAQ:LNCO): As of March 31, the only significant operations performed by LinnCo LLC (NASDAQ:LNCO) were the acquisition of shares of Linn Energy LLC (NASDAQ:LINE). However in their latest quarterly report, LinnCo LLC (NASDAQ:LNCO) has expressed an intent to expand its activities. LinnCo LLC (NASDAQ:LNCO) intends to serve as a vehicle through which Linn Energy LLC (NASDAQ:LINE) can make acquisitions.
For the time being LinnCo LLC (NASDAQ:LNCO) is first and foremost a shareholder in Linn Energy LLC (NASDAQ:LINE). According to their latest 10-Q (which is up to date only as of March 31) Linn Co controls approximately 15% of the stock of Linn Energy LLC (NASDAQ:LINE). With Linn Energy LLC (NASDAQ:LINE)’s $7.9 billion dollar market cap, a 15% stake ought to cost you $1.185 billion. Linn Co currently has a market cap of $1.3 billion, making them slightly more expensive than Linn Energy on a relative basis.
2) Linn Energy – Linn Energy is an oil and natural gas company based in Houston Texas. The company’s reserves break down like this: 55% natural gas, 20% natural gas liquids, and 25% oil. Definitely the bulk of focus is on nat gas here, but a decent amount of diversification into oil ensures your eggs aren’t all going into one fuel.
LINE operates solely in the United States, but they are spread out fairly well geographically. Areas of operation include: The Permian Basin in west Texas, The Hugoton Basin in Kansas, and the states of Oklahoma, California, and Michigan.
3) BreitBurn Energy Partners L.P. (NASDAQ:BBEP) – This is another oil and natural gas MLP, but unlike Linn Energy, BreitBurn Energy Partners L.P. (NASDAQ:BBEP) is more heavily focused on oil than natural gas. Reserves for BreitBurn Energy Partners L.P. (NASDAQ:BBEP) break down like this: 53% crude oil and 47% natural gas. The states of Michigan and Wyoming contain the majority of BreitBurn Energy Partners L.P. (NASDAQ:BBEP)’s reserves.
Juicy dividends
One of the most attractive features of any master limited partnership, or a company created with the sole purpose of owning one, is the massive dividend yield. Investing in a company that receives tax benefits in exchange for having to pay practically all earnings to shareholders doesn’t sound too bad to me. The payout ratio is almost always near 100%, but the returns are sky high. Here’s how the dividends (or distributions in the case of BreitBurn Energy Partners L.P. (NASDAQ:BBEP) and LNCO) of these three companies compare:
| LINE | LNCO | BBEP | |
| First Dividend: | 5/15/06 | 11/2/2012 | 2/14/07 |
| Quarters Missed Since First: | None | None | 4 |
| Ever Lowered the Dividend? | No | No | Yes |
| Current Dividend Yield: | 8.7% | 7.9% | 10.6% |
From where I’m standing, the dividend of Linn Energy is the clear cut winner here. Although its yield comes in second to Breitburn, it strikes me as the superior dividend for a few reasons. LINE has been paying a dividend longer, has never lowered it, and has never missed a quarter paying. Those are symbols of strength I like seeing in a dividend.
Final foolish thought
Master limited partnerships are an excellent form of investment for income seeking individuals. Here we have Linn Co, whose sole business activity is owning approximately 15% of Line Energy, selling for a price equal to 16.45% of LINE’s market cap. I see no reason to buy LNCO when it is trading at a valuation that is relatively high to its stake in LINE. Then there’s Breitburn Energy Partners yielding a scorching 10.6%. However, the dividend history of Breitburn is, in my eyes, inferior to that of Linn Energy. All of these companies appear fairly attractive at current levels, however if I had to pick one I’d go with LINE.
Fool blogger Ryan Palmer has no positions in any of the stocks mentioned. The Motley Fool recommends shares of BreitBurn Energy Partners L.P. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article These Natural Gas MLPs Deserve Your Attention originally appeared on Fool.com is written by Ryan Palmer.
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