Linn Energy (Nasdaq:LINE) has an extensive inventory of development projects, and has fully hedged its production for the next three years, protecting the company from earnings degradation if there is a further drop in commodity prices. Linn Energy is an oil and gas exploration and production company with assets in the mid-continent and California areas. The company had 1.7 Tcfe (trillion cubic feet equivalent) of proved reserves at the end of 2008, and its production is split about evenly between natural gas and oil and other liquids. (For more, see our Oil And Gas Industry Primer.)
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Linn Energy has properties in the Granite Wash and other areas of the Texas Panhandle. The company believes it has more than 4000 drilling locations here. The Granite Wash is located in the Texas and Oklahoma panhandle areas and has been attracting more and more capital from the industry. Another company active here is Unit Petroleum (NYSE:UNT). The company said during its conference call that the area earns a 19-20% rate of return assuming a $3.00 per Mcf (thousand cubic feet) natural gas price and $35 per barrel of oil. Newfield Exploration (NYSE:NFX) took advantage of its large portfolio of assets and dropped a rig in the Woodford shale, and added one in the Granite Wash.

Despite the good economics, the fall in natural gas prices has caused some impairment of properties. Noble Energy (NYSE:NBL) took a $437 million impairment, due mostly to the Granite Wash, in the first quarter of 2009. In California, Linn holds mature oil assets in the Los Angeles basin, where oil was first found in 1880. These are long-lived assets that have been producing for many years. Other companies with assets in California include Occidental Petroleum (NYSE:OXY), which has interests in the Elk Hills field near Bakersfield. The company has other properties and is the third-largest oil producer in the state. (Read more impairement in our related article, Impairement Charges: The Good, The Bad and The Ugly.)

Capital Program and Hedge Position
Although 13% of its reserves are in California, Linn will spend almost its entire capital budget of $150 million in 2009 in the mid-continent area. Perhaps the most attractive part of Linn Energy is its hedge program. The company has hedged 100% of its current production at prices far above current market prices. In 2009, natural gas production is hedged at an average price of $8.32 per Mcf, while oil and natural gas liquids production is hedged at $102.21 per barrel. In 2010, natural gas production is hedged at an average price of $8.26 per Mcf, while oil and natural gas liquids production is hedged at $99.68 per barrel. Of course, these hedges may hurt the company if commodity prices retest the highs of the summer of 2008.

Linn Energy paid a distribution of 63 cents per unit in the first quarter of 2009. If you annualize this payout, the yield comes to nearly 15%. Other energy companies with a high dividend yield include Martin Midstream Partners LP (Nasdaq:MMLP), which has a trailing 12-month yield of 16.4%.

The Bottom Line
Linn Energy had the foresight to hedge its production over the next few years, a strategy that so far has proved beneficial. Investors who own Linn Energy also benefit from the company's extensive development inventory. (For more, read The Industry Handbook: The Oil Services Industry.)