Why Linn Energy LLC's 12% Surge Today Actually Means Something

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Linn Energy (NASDAQ: LINE  ) and its holding company LinnCo (NASDAQ: LNCO  ) both saw shares jump 12% and 10%, respectively, following the company's announcement that it would slash its capital expenditures for 2015, cut its annual dividend payment from $2.90 to $1.25, and signed a development deal with The Blackstone Group (NYSE: BX  ) for the drilling of several lesser developed acreages owned by Linn.

So what: Unlike all the other pops and drops that Linn has experienced in the past month or so, this one actually has some tangible business decisions behind it rather than pure price speculation. The company announced that its 2015 capital exploration budget would be $730 million, 53% less than last years budget. Most of that budget will be going toward optimizing production from current wells and drilling new natural gas wells in some of its lower decline rate regions. Also, by cutting its dividend by 56%, it will reduce its fiscal obligations for the year by $545 million and giving the company a much more comfortable distribution coverage ratio of 1.18 times for the year.

Now what: For those who bought Linn Energy a while ago and just watched their cost based yield go up in smoke, don't fret too much. By making the cuts now and maintaining a strong distribution coverage ratio through an extremely rough patch for oil prices instead of trying to rough through it by issuing debt or equity or selling assets, management is setting itself up to either come out of this price drop strong -- or betting on a low price environment for longer than many investors may hope for. This is a sign of conservative management, which is very necessary for a company that runs such a tight cash business.

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