As Warren Buffett would say, investors should be greedy when others are fearful and fearful when others are greedy. When it comes to oil and gas Master Limited Partnership Linn Energy LLC (NASDAQ:LINE), it’s fair to say that investors are fearful. The stock has been besieged in recent days by a negative article, which has crushed the stock and shaken the temperament of even the company’s most confident unit holders.
At this point, it’s worth taking a level-headed approach to Linn Energy LLC (NASDAQ:LINE). For investors who aren’t scared of buying when there’s blood in the streets, today’s price may prove to be a screaming bargain.
The curious case of Linn Energy
It’s no secret that Linn Energy LLC (NASDAQ:LINE) is under fire. First, an extremely negative article in Barron’sclaimed that Linn Energy “may be the country’s most overpriced large energy producer.” Going so far as to bring the company’s accounting practices into question, the article essentially makes the argument that Linn Energy LLC (NASDAQ:LINE)’s fundamentals are deteriorating and that the company’s huge distribution yield is vulnerable to a cut.
Questioning a company’s accounting and its very business operations are serious allegations. It’s true that Linn Energy had a poor first quarter. The company’s production came in below expectations, and its distributable coverage ratio, a metric used to describe an MLP’s ability to pay its distribution, fell to below 1.0 times. That means that the company paid out more in distributions than it could afford.
However, it’s important to not get carried away with one quarter worth of results. Linn Energy LLC (NASDAQ:LINE) blamed its poor quarterly results on severe winter weather, which caused production slowdowns. Investors should remember what they’re getting from Linn: namely, a giant distribution.
The distribution keeps gushing higher
Linn Energy LLC (NASDAQ:LINE) is a Master Limited Partnership, which means it enjoys a favorable tax structure as long as it pay out the vast majority of its distributable cash flow to investors. Indeed, the company was recently paying $2.90 per unit, amounting to an 8% yield after the recent sell-off.
Furthermore, two developments should have investors excited: first, the company recently raised its distribution to $3.08 annualized, representing a 6% increase. Secondly, Linn Energy announced plans to pay its distribution monthly rather than quarterly, meaning unit holders will be able to compound their wealth even faster than before.
The new distribution level of $3.08 amounts to a yield of 8.8%, thanks to the steep sell-off after the Barron’s article. That kind of yield provides a hefty dose of downside protection and is truly compelling considering interest rates are at historic lows and the S&P 500 Index currently yields only 2%.
Moreover, the company’s CEO recently stated on CNBC that he fully expects Linn’s distributable coverage ratio to be well above 1.0 times in the near future.
That being said, investors don’t have to settle for an MLP they aren’t comfortable with. Several other well-managed, profitable companies are available within the oil and gas MLP space. If you’re willing to concede a couple hundred basis points in yield, you can avoid the dark storm clouds of questionable accounting and investor pessimism.
Kinder Morgan Energy Partners LP (NYSE:KMP) and Buckeye Partners, L.P. (NYSE:BPL) are also Master Limited Partnerships in the oil and gas industry, and both have provided investors with recent distribution increases.
Kinder Morgan Energy Partners LP (NYSE:KMP) holds a $33 billion market value and operates 75,000 miles of pipelines and 180 terminals. The company’s pipelines transport products including natural gas, refined petroleum products, and crude oil.
Buckeye Partners, L.P. (NYSE:BPL) is no slouch, holding approximately 6,000 miles of pipeline. Buckeye also owns approximately 100 liquid petroleum products terminals with aggregate storage capacity of over 70 million barrels.
Kinder Morgan Energy Partners LP (NYSE:KMP) has raised its distribution steadily for many years, with its most recent April payout being 8% higher than the April payout last year. The company yields nearly 6% at recent prices.
Likewise, Buckeye Partners, L.P. (NYSE:BPL) recently announced a 1.2% distribution increase, and provides a hefty 6.25% at current prices.
The conclusion: Linn’s risk-reward too good to pass up
Investors would be wise to consider oil and gas MLPs, particularly for those who love to receive income from their investments. Kinder Morgan and Buckeye Partners are high-quality MLPs that have recently increased their distributions to shareholders and provide yields far in excess of what the broader stock market has to offer.
For investors willing to wade into deeper waters, Linn Energy is trading at $34.50, a level not seen since 2011. The company itself maintains that it’s worth much more, and brave investors who buy in are receiving a huge distribution yield. Assuming the company can get its operations back on solid footing going forward, this combination of capital gain potential and yield make Linn Energy a truly compelling opportunity. I will be putting the stock on my watch list and will sincerely consider buying once the dust settles a bit, and I would advise income investors to do the same.
The article What’s Going on With Linn Energy? originally appeared on Fool.com is written by Robert Ciura.
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