LINE
Re: LINE
Linn's Accounting and Value
To the Editor of Barrons:
Barron's reporter Andrew Bary is in the vise of a small group of unprincipled short sellers on Linn Energy . Barron's again has published (for the third time) distortions about Linn ["Linn Comes Clean on Derivative Costs," Follow Up, June 17]. In an earlier article, Barron's said Linn [ticker: LINE] "has for years used aggressive accounting to prettify its financial statements" [see "Twilight of a Stock-Market Darling," May 6]. Yet the latest story acknowledges that the company's financial statements are entirely accurate: Barron's writes that the item at issue, accounting for hedges, "is properly reflected in Linn's GAAP financials."
Barron's has written that the capital Linn formerly committed to commodity options was spent "largely [on] in-the-money puts on natural gas." This is wrong. Bary is conflating the spot price of gas with the forward curve, which has long been in contango [the futures are trading above the spot price]. He writes that "this has allowed the company to get more than $5…for its gas when the market price has been $4 or lower." He is twisting facts to suggest that there is something untoward about hedging gas five years out at a premium to spot prices.
In a recent 8-K filing with the Securities and Exchange Commission, Linn said that "the majority [of puts] were purchased below the market. Out of more than 40 hedging transactions in the last 10 years, only seven were purchased 'in the money.' " All of the company's new hedges are in the form of costless swaps, as are the great majority of its old hedges.
In discussing Linn's puts—and again, the company has stated formally that it has discontinued buying them—Barron's said "the company wants to recognize the financial benefits of the puts, but not the costs." This, too, is wrong. The company capitalized the cost of its puts, in full accordance with FAS 133 ("Accounting for Derivative Instruments and Hedging Transactions"), and the cost is marked to market each quarter, again in full accordance with FAS 133.
Does Bary contend that Linn's accounting is in error? He suggests as much. Perhaps Bary is confused by the metric of Ebitda [earnings before interest, taxes, depreciation, and amortization], which does not incorporate the capital cost of derivatives—just as Ebitda does not incorporate any capital costs. Ebitda by definition excludes the noncash charges by which capital costs are recovered by all companies.
On valuation, Barron's repeats a favorite allegation of short sellers: that Linn's stock is worth only "$5.48 to $18.17 per unit." This value is based largely on the company's 2012 SEC-10 calculation, which, as all informed energy investors know, was artificially reduced by the low gas prices of last year. In Linn's case, the backward-looking SEC value uses a fixed natural-gas price of $2.76 per thousand cubic feet; the forward curve for 2018, where Linn is currently hedging, is now $4.75.
Outside of the dedicated short group, there are a number of reasonable valuations placed on Linn. In the merger discussions with Berry Petroleum [BRY], Citigroup, advising Linn, performed extensive due diligence and provided four separate valuation analyses for LinnCo [LNCO, a corporation created by Linn that holds Linn units], using comparables, discounted cash flow, and two net-asset-value calculations, which have an average midpoint value of $39.64. Credit Suisse, advising Berry, also performed extensive due diligence and provided three valuations of LinnCo, with an average midpoint of $35.92. Barron's did not report on these detailed valuations, all of which were filed with the SEC.
Importantly, these expert valuations of LinnCo incorporate the fact that LinnCo will incur some corporate tax liability [in buying Berry]. According to the joint LinnCo-Berry proxy, that liability is expected to be about $6 million annually through 2015, which Linn agreed to absorb in arm's-length negotiations. For some reason, Bary sees this as a red flag: "There could be adverse tax consequences from the Berry deal for LinnCo holders, starting in 2016…Berry investors might want to think hard about approving the Linn merger, considering Linn's aggressive accounting and the potential tax hit."
He also ignores an important statement by Linn in a release announcing the Berry deal. Linn said, "In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo's tax liability will be in the range of 2% to 5% of dividends paid, which is the same as the estimates provided in the prospectus for the LinnCo initial public offering. Therefore, this transaction is not estimated to give rise to any additional tax liability for LinnCo."
Barron's also ignores the fact that Citigroup, in its valuation of Berry, quantified the net present value of the actual cash tax liability that would arise from the merger transaction at LinnCo. Citigroup's estimate was a total of 54 cents to 60 cents per LinnCo unit over the life of all tax payments.
We believe that this newly raised issue of a potentially large 2016 tax liability at Linn is a straw man erected by Bary and his short sources. Any investors who are concerned about such an eventuality should also be worried about the hobgoblins in their bedroom closet. Omega Advisors is comfortable with our investment in Linn Energy; we are convinced of the professionalism and integrity of the company's management; we are optimistic about the company's future growth and financial performance; and we believe strongly that the distortions of the three Barron's articles will not, in the end, carry the day.
Leon G. Cooperman
Chairman and CEO
Omega Advisors
To the Editor of Barrons:
Barron's reporter Andrew Bary is in the vise of a small group of unprincipled short sellers on Linn Energy . Barron's again has published (for the third time) distortions about Linn ["Linn Comes Clean on Derivative Costs," Follow Up, June 17]. In an earlier article, Barron's said Linn [ticker: LINE] "has for years used aggressive accounting to prettify its financial statements" [see "Twilight of a Stock-Market Darling," May 6]. Yet the latest story acknowledges that the company's financial statements are entirely accurate: Barron's writes that the item at issue, accounting for hedges, "is properly reflected in Linn's GAAP financials."
Barron's has written that the capital Linn formerly committed to commodity options was spent "largely [on] in-the-money puts on natural gas." This is wrong. Bary is conflating the spot price of gas with the forward curve, which has long been in contango [the futures are trading above the spot price]. He writes that "this has allowed the company to get more than $5…for its gas when the market price has been $4 or lower." He is twisting facts to suggest that there is something untoward about hedging gas five years out at a premium to spot prices.
In a recent 8-K filing with the Securities and Exchange Commission, Linn said that "the majority [of puts] were purchased below the market. Out of more than 40 hedging transactions in the last 10 years, only seven were purchased 'in the money.' " All of the company's new hedges are in the form of costless swaps, as are the great majority of its old hedges.
In discussing Linn's puts—and again, the company has stated formally that it has discontinued buying them—Barron's said "the company wants to recognize the financial benefits of the puts, but not the costs." This, too, is wrong. The company capitalized the cost of its puts, in full accordance with FAS 133 ("Accounting for Derivative Instruments and Hedging Transactions"), and the cost is marked to market each quarter, again in full accordance with FAS 133.
Does Bary contend that Linn's accounting is in error? He suggests as much. Perhaps Bary is confused by the metric of Ebitda [earnings before interest, taxes, depreciation, and amortization], which does not incorporate the capital cost of derivatives—just as Ebitda does not incorporate any capital costs. Ebitda by definition excludes the noncash charges by which capital costs are recovered by all companies.
On valuation, Barron's repeats a favorite allegation of short sellers: that Linn's stock is worth only "$5.48 to $18.17 per unit." This value is based largely on the company's 2012 SEC-10 calculation, which, as all informed energy investors know, was artificially reduced by the low gas prices of last year. In Linn's case, the backward-looking SEC value uses a fixed natural-gas price of $2.76 per thousand cubic feet; the forward curve for 2018, where Linn is currently hedging, is now $4.75.
Outside of the dedicated short group, there are a number of reasonable valuations placed on Linn. In the merger discussions with Berry Petroleum [BRY], Citigroup, advising Linn, performed extensive due diligence and provided four separate valuation analyses for LinnCo [LNCO, a corporation created by Linn that holds Linn units], using comparables, discounted cash flow, and two net-asset-value calculations, which have an average midpoint value of $39.64. Credit Suisse, advising Berry, also performed extensive due diligence and provided three valuations of LinnCo, with an average midpoint of $35.92. Barron's did not report on these detailed valuations, all of which were filed with the SEC.
Importantly, these expert valuations of LinnCo incorporate the fact that LinnCo will incur some corporate tax liability [in buying Berry]. According to the joint LinnCo-Berry proxy, that liability is expected to be about $6 million annually through 2015, which Linn agreed to absorb in arm's-length negotiations. For some reason, Bary sees this as a red flag: "There could be adverse tax consequences from the Berry deal for LinnCo holders, starting in 2016…Berry investors might want to think hard about approving the Linn merger, considering Linn's aggressive accounting and the potential tax hit."
He also ignores an important statement by Linn in a release announcing the Berry deal. Linn said, "In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo's tax liability will be in the range of 2% to 5% of dividends paid, which is the same as the estimates provided in the prospectus for the LinnCo initial public offering. Therefore, this transaction is not estimated to give rise to any additional tax liability for LinnCo."
Barron's also ignores the fact that Citigroup, in its valuation of Berry, quantified the net present value of the actual cash tax liability that would arise from the merger transaction at LinnCo. Citigroup's estimate was a total of 54 cents to 60 cents per LinnCo unit over the life of all tax payments.
We believe that this newly raised issue of a potentially large 2016 tax liability at Linn is a straw man erected by Bary and his short sources. Any investors who are concerned about such an eventuality should also be worried about the hobgoblins in their bedroom closet. Omega Advisors is comfortable with our investment in Linn Energy; we are convinced of the professionalism and integrity of the company's management; we are optimistic about the company's future growth and financial performance; and we believe strongly that the distortions of the three Barron's articles will not, in the end, carry the day.
Leon G. Cooperman
Chairman and CEO
Omega Advisors
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group