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Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When we talk about a company with an exposure to natural gas, the first thing that strikes our mind is the falling natural gas prices which will almost definitely hurt the company’s profitability. The pessimism would fade away completely if I tell you that the company that we’re talking about has hedged its exposure in oil and natural gas through the next 5 years. By doing so, the company now needs to focus on its topline and efficiency of its operations. Linn Energy (NASDAQ: LINE) is the company I was referring to and here are a few reasons why you should be bullish about it.
Linn Energy is an energy player involved in the extraction and production of natural gas, natural gas liquids and oil. The Texas based company started its operations in 2003 and since then, Linn Energy has grown significantly. The company with a market cap of $8.23 billion highlights in the list of top ten independent exploration and production companies in the US.
The Hedging Advantage
The beauty of this investment option is that its natural gas production is hedged 100% through 2017, and oil production hedged till 2016. This does limit the profits, but at the same time dramatically reduces the risks posed by market volatility. Another advantage is that Linn Energy by hedging its exposures to these commodities has ensured a fixed profit percentage per sale it makes, irrespective of the price of the commodities. It is due to this reason that I believe the company’s earnings will increase with an increase in its topline. With the various stimulus packages in action, around the globe, with an aim to kick start the global growth engine, any further increase in the demand of these commodities would mean added profits for the company.
On an Acquisition Spree?
The company recently announced its $1.025 billion worth of accretive acquisition of Jonah field in Wyoming from British Petroleum (NYSE: BP) . Earlier this year, Linn also announced the acquisition of 600,000 acres of land properties from BP for $1.2 billion. In another deal, the company agreed to pay $400 million for a stake in Wyoming’s oil field, developed by Anadarko Petroleum Corp (NYSE: APC). This year alone, Linn Energy has spent nearly $2.96 billion on acquisitions, which is quite a hefty amount for a company with an annual income of $893 million. The management at the company believes that the current downturn in the prices of natural gas is only short term, which has allowed Linn Energy to acquire assets at cheap valuations.
Beating the Peers
Linn Energy is a limited liability partnership focused on delivering a high payout to its shareholders. It is due to this reason that the company yields the highest dividend amongst most of the oil producing peers in the industry. Competitors of Linn Energy are British Petroleum, Anadarko Petroleum Corp., Chesapeake Energy Corp (NYSE: CHK) and Devon Energy Corp (NYSE: DVN). Let’s take a look at the metrics of all the companies together.
|
Company |
Yield |
Net Profit Margin |
ROI |
PEG |
|
Linn Energy |
7.03% |
36.73% |
10.52% |
1.01x |
|
British Petroleum |
4.47% |
4.57% |
8.43% |
2.55x |
|
Anadarko Petroleum |
0.50% |
-9.15% |
-2.67% |
N/A |
|
Chesapeake Energy |
1.81% |
19.52% |
7% |
0.82x |
|
Devon Energy Corp |
1.31% |
22% |
6.76% |
1.6x |
The comparison of the metrics show that Linn Energy has a borderline cheaply valued compared to British Petroleum, and enjoys the highest net profit margins amongst all its peers. Linn Energy also has the best ROIs and to top it all, the company yields the highest dividend.
On taking a look at the performance of the stocks of all the companies, we can see that Linn Energy has outperformed all of its peers in terms of returns YTD.
The Foolish Takeaway
Overall the company with its hedges in place, looks well placed to grow with an increase in the demand for natural gas and oil. The management at Linn Energy looks to be in an aggressive mode with acquisitions worth $2.96 billion YTD. Additionally the company has been outperforming its peers in terms of returns on its stocks price YTD, with the best fundamentals amongst the peers. The final piece of evidence is the high yield the company offers, which makes me seal the stock with a foolish buy rating.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
