Linn Energy LLC (LINE) became the new year’s first victim of plunging energy prices, as the independent oil-and-gas developer was forced to slash its spending plans, cutting both its capex budget and dividend.
Linn Energy said it will cut its capital spending by 53% to $730 million this year, and slash its shareholder payout to $1.25 from $2.90. Linn Energy said its LinnCo LLC (LNCO) subsidiary will reduce its annual dividend by the same amount.
Linn Energy said it plans to fund its 2015 capital program and dividend payouts from internally generated cash flow, a signal that even if it can tap the debt markets, it would be too expensive.
Linn Energy might be the first oil-and-gas independent to issue such a warning this year, but it won’t be the last — not with oil prices in free fall.
With oil prices down by half since June, a number of energy industry stocks are reeling — and that has dividend yields in certain subsectors hitting absurd levels. Just look at the S&P 500, where the list of stocks with the highest dividend yields is dominated by oil drillers, but only because their shares have fallen so far.
No Bright Side for Linn Energy or LINE Stock
As wonderful as $50-a-barrel oil might be for consumers and industries such as airlines and automakers, it’s threatening any number of smaller energy outfits — in some cases down to their very existence.
Ordinarily, a market is supposed to find equilibrium on its own. The oil supply glut should have led to production cuts. But Saudi Arabia wants to protect its market share, and it can afford to do so.
After all, it costs Saudi Arabian producers only about $7 a barrel to get their oil out of the ground. The average U.S. shale-oil well needs oil to be more than $70 a barrel to break even.
At the same time, with parts of Europe and Japan flirting (or in) recession and slower-than-expected growth in China, the global economy isn’t doing anything to sop up all the extra oil sloshing around the market.
As a result, the oil market has players like Linn Energy dealing with prices well below even their worst-case scenarios — and the stock market knows it. The yield on LINE stock sat at an absurdly high 22% before it slashed the dividend, but only because Linn Energy stock lost nearly 70% in 2014.
At some point, the energy sector will be ripe for picking off select names for the bargain-basement-buy potential. Highly diversified energy majors such as Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX) might already be there.
But the independents — as well as the drillers and services companies — are still looking mighty risky, and the ones with the highest dividend yields are at the most risk of all.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- 10 Best S&P 500 Stocks of 2014
- 7 Market Risks That Could Shock Stocks in 2015
- 7 Biggest Investment Opportunities of 2015