Is Linn Energy a "Buy" After Another Bear Attack?

    Text size
Linn Energy LLC (Nasdaq: LINE) is facing its second bear attack of the year and the catalyst is another Barron's article.

As in the first attack, the publication is again questioning Linn's accounting methods and whether the company can maintain its robust dividend, which now stands at 8.3%.

The recent slam stated "Linn Energy may be the country's most overpriced large energy producer" and went on to say shares "may be worth less than half of their current quote, based on a range of financial measures, including book value, cash flow, and the value of energy reserves."

Barron's initially questioned how Linn accounts for its hedging of gas and oil prices in a Feb. 18 article. While those concerns still remain, Barron's now addresses a concern with Linn's core business, flattening energy production.

In the first quarter, Linn had total energy production averaging 796 million cubic feet per day, below the 800 million cubic feet a day in the fourth quarter of 2012 and up only 1.8% from last year's third-quarter production of 782 million cubic feet.

However, Linn recently announced a deal to acquire oil company Berry Petroleum Co. (NYSE: BRY), which gives Linn a better balance of oil and natural gas reserves.

That deal is expected to close later this year and when it does, Linn expects to raise its quarterly dividend from 72.5 cents to 77 cents. Linn is the eighth-biggest master limited partnership in the U.S., and the largest energy producer structured as an MLP.

Retail investors have flocked to Linn and especially its counterpart, LinnCo LLC (Nasdaq: LNCO), which was created to buy LINE stock and offer investors interested in LINE the tax benefits of an MLP without the extra tax work associated with owning one. Since it started trading last October, LNCO, which pays a 7.5% dividend, had been up 12% before LINE's recent slide.

So after the recent selloff, are high-paying dividend stocks LINE and therefore LNCO "Buys," or stocks to avoid?

How to Play Linn Energy

I asked two of our Money Morning experts, Global Energy Strategist Dr. Kent Moors and Capital Wave Strategist Shah Gilani, to weigh in on what investors should do about Linn Energy.

Here is Moors' take:

"I am not a fan of LINE. It has been on my tracking lists for over two years and is 10.5% in the red for that period. It's down almost 10% for the week and down roughly the same amount for the month, despite the market being up.

"The Barron's piece you mention is right on the money. Yet, my view of the stock has nothing to do with either that piece or the hedging questions. There is simply too much 'smoke under the hood' to warrantmy recommending this used car. There is sometimes a reason for high yields other than what is on an MLP's balance sheet.

"Linn has been able to offset some suspect management decisions via a very energetic hedging strategy, but that never augurs well for a company that is supposed to be acquiring production reserves to increase market share. This is an MLP whose return is founded more on derivatives than drilling. Even though the stock has fallen from its recent 52-week high, I still think it's overpriced."

Gilani shares similar thoughts:

"From a simple stock-picking philosophy, I never like to be blindsided, especially on a high-dividend paying position.

"I was in LINE as an energy play and for its dividend. While I understand energy has been under pressure, and understand why the stock would be weak, I don't understand accounting issues I can't see. The problem with being blindsided on accounting issues is that they're never transparent in the first place and any impression, it doesn't have to be a fact, of accounting impropriety is a big red flag. If I can't get into the books, which no one can but management (and unfortunately, I include accountants), I want out.

"From a trading perspective, if you believe their accounting is sound and the dust-up is much ado about nothing, I say, go ahead buy some call options, they're cheap right now. But for my money, out of sight, in this case accounting transparency, means out of my portfolio."

Moors is an internationally recognized energy expert who advises the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, the governors of several U.S. states and the premiers of two Canadian provinces.

Gilani has more than 30 years of investing experience managing multiple hedge funds and trading on the Chicago Board of Options Exchange. He is considered one of the leading experts on the credit crisis.

Thanks to their behind-the-scenes access to the energy and financial markets,each provides insight and investing opportunities you can't find anywhere else.

To learn more about what investments they like now, check out Moors' Oil and Energy Investor and Gilani's Wall Street Insights and Indictments.

They're both free.

Related Articles and News: