Investors with new money, look no further for an investment opportunity that doesn't come around but once in a long while. The fall in oil has caused share prices to crumble, but this one player is poised to reward shareholders with growth going forward and a solid 10% yield to boot.
On Friday, January 2, Linn Energy LLC (Nasdaq: LINE) became the first upstream (owners of oil and gas wells) master limited partnership – MLP – to bite the bullet and reduce its very high-yield distributions paid to investors. With the LINE unit price pushed down by over 50% since the price of crude oil started its steep decline from over $90 per barrel down close to $50 per barrel, this move has been expected by the market. For investors with new money to put to work, the retrenchment by Linn offers a chance to get in at a new, current 10%+ yield that should grow over time.
The announcement from Linn has two parts. First, the company announced a 53% reduction in capex spending – money that is invested in new drilling activities to grow production – to $730 million, compared to $1.55 billion spend in 2014. Second the annual distribution rate was reduced to $1.25 per unit, down from the $2.90 per unit paid for the last two years. The new investment and distribution rates allow Linn to pay these expenses from the forecasted internally generated cash flow for 2015. In the past Linn has financed its capex spending by added debt or issuing additional partnership units.
With the new distribution rate, LINE now yields a still very attractive 11%. More importantly, Linn will have a much greater opportunity to increase distributions if and when crude oil and natural gas prices start to move upward again.
Linn Energy offers investors two classes of shares. LINE units are traditional limited partner units. With these, the monthly distributions are not taxable income and investors receive an IRS Form K-1 to file taxes with. MLP units like LINE are tax-advantaged and should be owned in a taxable account. Each LinnCo LLC (Nasdaq: LNCO) is backed by one LINE unit and currently pays the same monthly distribution. LNCO investors receive an IRS form 1099, and the LNCO distributions may be classified as a combination of taxable income or return of capital. LNCO units are the way to invest in Linn Energy using tax-qualified money, such as an IRA.
