Why Linn Energy (LINE) and LinnCo (LNCO) Are Tumbling

NEW YORK (TheStreet) -- Linn Energy  (LINE) and LinnCo (LNCO) are tumbling on Monday after receiving a downgrade from JPMorgan.

By late afternoon, shares of Linn had taken off 5% to $27.55, and trading volume of 2.1 million had exceeded its three-month average of 1.9 million.

LinnCo, which owns Linn Energy units and focuses on the development of oil and natural gas properties, had slipped 6.5% to $26.37. Trading volume of 2.7 million was higher than its three-month daily average of 1.4 million.

JPMorgan downgraded both Linn and LinnCo to "neutral" from "overweight" with $30 target prices. The firm previously had price targets of $36 on the companies.

The firm said Linn Energy's guidance had missed estimates. Last month, the Houston-based oiler said it expects first-quarter production between 1,070 and 1,100 MMcfe/d and production for the full-year 2014 between 1,070 and 1,140 MMcfe/d, which includes the potential impact of ethane rejection for the year of approximately 22 MMcfe/d.

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TheStreet Ratings team rates LINN ENERGY LLC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate LINN ENERGY LLC (LINE) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, generally higher debt management risk and disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 7.8%. Since the same quarter one year prior, revenues slightly increased by 9.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has slightly increased to $225.70 million or 9.31% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -23.37%.
  • LINN ENERGY LLC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. However, the consensus estimate suggests that this trend should reverse in the coming year. During the past fiscal year, LINN ENERGY LLC reported poor results of -$2.78 versus -$1.86 in the prior year. This year, the market expects an improvement in earnings ($1.66 versus -$2.78).
  • Currently the debt-to-equity ratio of 1.56 is quite high overall and when compared to the industry average, suggesting that the current management of debt levels should be re-evaluated. Along with this, the company manages to maintain a quick ratio of 0.43, which clearly demonstrates the inability to cover short-term cash needs.
  • The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, LINN ENERGY LLC's return on equity significantly trails that of both the industry average and the S&P 500.

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TheStreet Ratings team rates LINNCO LLC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate LINNCO LLC (LNCO) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, expanding profit margins and notable return on equity. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, a generally disappointing performance in the stock itself and feeble growth in the company's earnings per share."

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Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • LNCO has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. To add to this, LNCO has a quick ratio of 2.22, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for LINNCO LLC is currently very high, coming in at 100.00%. LNCO has managed to maintain the strong profit margin since the same quarter of last year. Despite the mixed results of the gross profit margin, LNCO's net profit margin of 330.80% significantly outperformed against the industry.
  • Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, LINNCO LLC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock's performance over the last year: it has tumbled by 27.89%, worse than the S&P 500's performance. Consistent with the plunge in the stock price, the company's earnings per share are down 3075.40% compared to the year-earlier quarter. Turning toward the future, the fact that the stock has come down in price over the past year should not necessarily be interpreted as a negative; it could be one of the factors that may help make the stock attractive down the road. Right now, however, we believe that it is too soon to buy.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 4480.9% when compared to the same quarter one year ago, falling from $21.16 million to -$926.97 million.

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