This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Linn Energy Gaining Power as the Bad Headlines Fade Away

Back in March, Linn was trading at $29 -- as of this moment it is getting closer to $30, a move of about 3% in price. But don't forget we have also been collecting nearly 1% per month in distributions. Let's call it a 5% total return. Not particularly exciting but in line with the 4% return from the S&P 500 over the same period. What looks to be a fairly strong floor may have formed for Linn's shares.

As Linn's price has dropped last year, the corresponding spike in yield (pictured above) was fairly dramatic, since the distribution remained intact. Provided there is no immediate threat to Linn's distribution -- which hasn't been cut since the company went public in 2006; in fact, it has nearly doubled -- it seems there is a limit to how inexpensive its shares may get.

Also supporting the idea the stocks might've found a bottom, just two weeks ago it completed an asset swap with Exxon Mobil (XOM) that improved Linn's cash flow without issuing any new debt or equity.

Below you can see the behavior -- both yield and price -- for Linn Energy over the past two years. Appetite for LINE's beefy distribution puts downward pressure on its yield and upward pressure on price.

LINE Chart

Generally speaking, a master limited partnership trades based on the spread between its distribution yield and the yield on the 10-year Treasury. That spread will differ from MLP to MLP as each company carries unique risks for which an investor must be compensated.

Among others these include: the sustainability of its distribution; amount and cost of the company's debt load; diversification and quality of the MLP's assets; and forward-looking interest rate expectations. In the case of Linn, that spread is north of 7% (700 basis points) today, historically high for its shares.

Now that the patient is stabilized, our view is there is a good deal of room for that spread to shrink -- a 700-basis point spread implies an enormous amount of risk. There are three ways this can happen. The 10-year Treasury yield could spike, LINE could cut its distribution oran upward move in the stock price, whereby LINE's effective yield would come down. I think option 3 is the most likely at this point.

If the spread were to narrow from 7% to 5%, for instance, the implied price of LINE units is about $36. That's 20% higher than today's price. Along with a 10% current yield, the total return opportunity remains quite attractive.

We think it's worth walking the LINE.

At the time of publication the author had a position in LINE.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
LINE $0.50 0.00%
AAPL $94.02 0.00%
FB $104.07 0.00%
GOOG $683.57 0.00%
TSLA $162.60 0.00%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs