Key financial analysis
In this part of the series, we’ll analyze LINN Energy’s (LINE) financial health to see if it’s a good option for investors.
Earnings before interest, taxes, depreciation, and amortization (or EBITDA) is a broad measure of a company’s operating profitability. It’s widely used to determine a company’s financial health.
LINE’s EBITDA shows that it has been struggling with its earnings power lately. It has struggled despite a steady rise in its oil and gas production.
LINE’s debt exploded from just over $3 billion in 3Q11 to over $9.5 billion in 2Q14. This took its net debt to EBITDA from just under 4x to ~8.5x in the same timeframe.
A combination of subdued EBITDA and rising debt seriously weakened its ability to pay interest on its debt. This is reflected in its interest coverage falling below one.
LINE’s debt is now almost twice its equity—from a healthier level equal to its equity earlier. This may mean that if LINE is unable to decrease its debt, it may have to raise “equity” by selling more units soon.
It’s also concerning that its debt as a percentage of its assets has been increasing. This implies it’s relying on debt to acquire assets that may not be contributing to earnings—subdued EBITDA).
From LINE’s book value (or BV), or liquidation value—total assets minus total liabilities, it seems that the company has been eroding value for some time now.
Lastly, given LINE’s Enterprise Value (or EV)—roughly a summation of equity and net debt— has been ballooning with its debt. Its EV to EBITDA ratio has been rising.
These indicate that LINE’s units are trading at incrementally richer valuations.
So, given LINE’s likely need to issue more units and weakening oil and natural gas prices, its units may not hold at current levels for long.
Key exchange-traded funds (or ETFs)
Investors can gain diversified exposure to the booming energy sector. They should consider the Energy Select Sector SPDR (XLE), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the Alerian MLP ETF (AMLP). The SPDR S&P 500 ETF Trust (SPY) represents the even broader U.S. equity market.
Check out our Energy and Power page for more such interesting company and event analyses.