An old structure is back in season

From his 70th floor offices in the Chase Tower, Michael Linn can't figure out Houston weather, even six months after moving his company from Pittsburgh. It seems, he said, as if there are two seasons: blazing sun or torrential rain.

Linn has no complaints, though, about the business climate. Earlier this week, his Linn Energy announced the $2 billion acquisition of oil properties in the Midwest from Dominion Resources, a deal that will double the size of Linn Energy's total proved reserves.

The company is at the forefront of a new wave of limited liability companies and master limited partnerships — structures that leverage certain tax advantages and enable investors to capitalize on rising oil and natural gas prices, especially from older fields.

The Dominion acquisition, for example, probably will benefit Linn's investors before year's end if the deal closes Oct. 1 as scheduled.

The company said it would recommend its board increase its quarterly distribution by 11 percent because of the deal, meaning by the fourth quarter investors could be receiving a payout of $2.52 a unit. The value of the company's units, which are similar to shares of stock, have surged almost 90 percent in the past year.

Linn Energy buys only long-lived reserves. Properties that larger companies abandoned as uneconomic still have value to Linn, who's looking for a steady flow of production rather than the prospect of big find.

The company's partnershiplike structure means investors own the production, rather than a stake in a company. Partnership interests are taxed at a lower rate than stock gains, which makes the company appeals to retail investors looking for a steady return, which Linn said has been running about 6 percent.

Because the company isn't a corporation, Linn, who is chair-man and chief executive, doesn't need to find new oil and gas fields to drive earnings growth. His commitment to investors lies in the distribution, similar to a stock dividend, that's derived from the value of the producing reserves.

'Baby boomer vehicle'

"It's a baby boomer vehicle," said Linn, a 25-year veteran of the oil business in Appalachia. "It lengthens the life of the reserves. It's a way to get a higher valuation from older assets." Since then, he's found the structure appeals to institutions as well.

"There's a real market out there for the income investor," said Kurt Wulff, an independent analyst whose firm, McDep Associates, specializes in energy investment research. "If you've got good properties, the rate of return is pretty good."

A recycled idea

In the 1990s, investors who bought partnership stakes often fared better than those who bought stocks of exploration and production companies, according to Wulff's analysis.

Investors soured on the concept after some partnerships made failed bets on new drilling and took on too much debt. Weaker oil prices in the late '90s further eroded appeal.

Today, MLPs are in vogue again among oil producers, thanks to higher energy prices and better hedging strategies that allow companies like Linn Energy to shield themselves from fluctuating markets.

Houston's Plains Exploration and Production, XTO Energy of Fort Worth and Pioneer Natural Resources, which was formed in part from Pickens' Mesa, have all said they are considering putting some of their older properties in MLPs.

Watch the fees

As a limited liability company, Linn's structure is a little different. There's no general partner, so Linn investors pay no fees. All the owners, from Linn himself who holds 7.3 percent, to the smallest retail investor, are treated the same, he said.

Linn may still be trying to figure out the weather in his adopted hometown, but he's helping change the investment climate in the Oil Patch.