Can Linn Energy Make Distribution Payments?

The Company: Linn Energy, an independent oil and gas company with core operating areas in the Texas Panhandle and Oklahoma.
The Filing: FORM 10-Q filing with the SEC on November 6, 2008.
The Finding: Consistent with its strategy of monetizing non-core positions, Linn Energy sold approximately $1 billion of oil and gas assets during the last six months of 2008, including the closing of about $600 million in oil and gas properties located in the Appalachian Basin to XTO Energy. In addition to selling near the commodity bubble peak, management also strengthened its balance sheet and assured consistent cash flow in coming quarters by contracting long-dated oil and gas hedge positions, too.

The Upshot: The assets sales are consistent with management's operating philosophy of sticking with lower risk, low decline opportunities. Linn has significant organic growth potential, with identified inventory of more than 4,100 locations sites on existing properties (principally in the Mid-Continent region) and up to 3.9 trillion cubic feet equivalent of reserves -- enough drilling activity for 15 years.

At current production levels (average production of 227.4 MMcfe/day), the Company has derivative contracts in place covering a 100% of forecasted production volumes through 2011. For 2009, the Company's natural gas production is hedged at a weighted average price of $8.32 per Mcf and oil and NGL production at $102.21 per barrel. For 2010, the Company's natural gas production is hedged at a weighted average price of $8.05 per Mcf and oil and NGL production at $99.68 per barrel.

Despite a sound business strategy, there is a risk involved with Linn Energy. The Company is structured as a limited partnership, paying out quarterly distributions to unit holders. For the nine-months ended September 30, share-net from continuing operations was a loss of 55 cents. The company paid out distributions totaling $1.89 a share.

The Question: Absent availability of existing credit facilities or additional asset sales, will Linn Energy be able to fund future dividend payments?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

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