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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Linn Energy LLC

July 27th 2012 Linn Energy LLC
Nasdaq Symbol: LINE
Industry: Oil and Natural Gas
Price as if 7/27: $39.15

As we continue through earnings season we are noticing many companies' earnings coming in better than expected. Solid earnings mixed with a market that is holding up well are positive signs in an environment in which growth around the world has slowed and European worries continue to weigh on investors. The past week has been a volatile one with 4 of the last 6 trading sessions closing after triple digit moves in the Dow. Last Friday, Monday, and Tuesday all dropped roughly 100 points each day; however Thursday was a great day rallying 211 points. The volatility is a seemingly endless roller coaster leaving many investors feeling nauseous and asking how do I get off this ride? The answer has been met by investors turning to dividend yielding investments with low betas. Fitting into this category is our stock of the week, Linn Energy. Linn provides its investors with a 7.30% yield and a beta of 0.91 (a beta less than one shows the company is less volatile than the overall market). Another positive to Linn is that it is similar to a master limited partnership (MLP) in that it provides tax advantages to its investors. (Please view a previous stock of the week, Kinder Morgan, for more information regarding the tax advantages of MLPs.)

Linn Energy LLC, is an independent oil and natural gas company, that engages in the acquisition and development of oil and gas properties. The company's properties are primarily located in the Mid-Continent, the Permian Basin, Michigan, California, and the Williston Basin in the United States. As of December 31, 2011, it had proved reserves of 3,370 billion cubic feet equivalent of oil and gas, and natural gas liquids, as well as operated 7,759 gross productive wells. The company released a good earnings report this week, although it did miss one estimate. Linn increased average daily production 76 percent to 630 MMcfe/d. It also increased adjusted EBITDA 21 percent to $319 million, compared to $264 million for the second-quarter 2011. Another positive is that it reduced lease operating expenses 29 percent to $1.22 per Mcfe. Where Linn missed an estimate was second-quarter distribution coverage ratio which was down 38 percent due to historically low NGL prices. Linn's CEO, Mark E. Ellis said, "LINN has delivered outstanding performance this year. We achieved a company record with $2.8 billion of acquisition announcements. The long-life, low decline acquisitions are expected to add 300 million cubic feet equivalent per day of production and increase total reserves by 1.7 Tcfe to 5.1 Tcfe." The positive increase year over year has led analysts to maintain its growth outlooks for the company.

Analysts forecast revenue of 1.89 billion for the current year and 2.34 billion for next year. Growth estimates show a 10.00% decline for the current year and a 31.50% increase for next year. Lastly, earnings per share estimates show an EPS of 1.62 for the current year and 2.13 for next year. Along with positive forecasts, Linn's valuation is solid trading at just 8 times earnings, 6 times sales, and 2 times book value. Linn has $24.18 million in cash but faces $4.93 billion in debt. Never the less, Linn offers lower volatility (beta of 0.91), a tax advantage, good growth estimates, and a great yield (7.30%). The yield alone will help provide support for the company, especially since the stock goes ex-dividend next Friday. Linn is well positioned to continue on their recent upward trend and when natural gas prices bounce back, the company will be able to capitalize.