Linn Energy (LINE) made a dramatic drop after Barron’s questioned the sustainability of the company’s dividend. The drop accelerated after the company said the Securities and Exchange Commission (SEC) would look more closely at the accounting methods, along with its merger with Berry Petroleum Company (BRY).
The story is not completely new. Barron’s questioned in February 2013 how derivatives to pay and attract investors. The independent Oil and Gas Company traded in a range of $35 to $40 for most of the year. Linn energy is the largest upstream MLP (Master Limited Partnerships) that pays a generous dividend. With the recent drop, shares now offer a dividend yielding 13%. Investors might be asking if Linn Energy is a buy after the drop, but the worry created buying opportunities for MLPs.
Background on MLPs
Upstream MLPs look for assets that do not require more exploration. These companies look for assets that will generate steady cash flow. The cash flow depends on two external factors: the price of natural gas with shale assets and the price of oil.
The numbers that investors need to scrutinize are:
· Forecast for commodity oil and natural gas prices
· Dividend payout as a ratio of cash flow
· Leverage ratios
In the long term, infrastructure building in energy will support a healthy MLP market.
BreitBurn (BBEP) is a steady dividend payer in the upstream MLP sector. Its share price was pulled down by the uncertainty created by Linn Energy:
Breitburn increased its quarterly cash distribution to $0.475, and now pays $1.90 per unit annually. The company made another big acquisition in June by acquiring Oklahoma Panhandle assets from Whiting Oil (WLL) for $860 million.
Click on the image below to see dividend yields over time. Dividend data sourced from Zacks Investment Research.
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Unless accounting scrutiny is being made for all MLPs, Breitburn represents a compelling buying idea. The company grew its payout steadily over the last few years, although payouts were stopped during the great financial recession. Since the latter event is not likely to happen in the foreseeable future, investors should look for a possible rebound in Breitburn shares.
Written by Chris Lau
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Dig Deeper: Access Company Snapshots, Charts, FilingsLinn Energy, LLC (LINE, Chart, Download SEC Filings) Berry Petroleum Co. (BRY, Chart, Download SEC Filings) Breitburn Energy Partners L.P. (BBEP, Chart, Download SEC Filings) Whiting Petroleum Corp. (WLL, Chart, Download SEC Filings)
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