Linn Energy (LINE)

[dan_s]

The Units sold off today on news of an SEC informal probe into their accounting for hedges. Do not read too much into the SEC inquiry. It is their job to look into multi-$Billion deals like this.

The U.S. Securities and Exchange Commission has asked the company to save documents related to the merger, hedging strategy and use of non-U.S. generally accepted accounting principles, or non-GAAP, measures, Linn Energy said.

"... It will not take the SEC very long to come to the same conclusion we did, which is that the company's accounting is in good order and represents the company's overall health," said Raymond James analyst Kevin Smith who downgraded the stock to "outperform 2" from "strong buy 1".

My take is that conservative investors buy MLPs for high yield. "Income Investors" really don't know how to value an MLP and this "noise" has rattled them. This afternoon's market selloff also played a part in the big drop in the unit price.

Read This: http://seekingalpha.com/article/1532172 ... urce=yahoo

My take on how to value LINE: "NPV 10, or projected cash flows from hydrocarbon assets discounted at 10% per year, is another common way to value upstream companies. As of the last report, Linn's PV 10 sits at $6.07 billion on the 65% of their reserves which are proven. If we include all of their unproven reserves, PV 10 would be $9.33 billion."
> LINE's market cap at the close today was $6.4 Billion.
> Keep in mind that LINE's 12-31-2012 PV10 was calculated by independent 3rd party engineers, using oil and gas prices on that date. At today's oil & gas prices the PV10 would be much higher.

I believe the acquisition of BRY will close in a couple months, which will send the short sellers running. Short covering rallies can be interesting. - Dan

[dan_s]

RBC late afternoon report on LINE --

SEC Inquiry Raises Multiple Questions; Offers Little Incremental Information
Our View: An informal inquiry into LINE by the SEC brings no new
material information to the table. While these inquiries are fairly common,
especially under the circumstances of a large transaction, we see the
only solid conclusion as being a delay in the closure of the BRY deal, and
an increased probability of an increased share exchange ratio, given the
weakness in LNCO.

[setliff]

http://seekingalpha.com/article/1535352 ... ting&ifp=0

Linn Energy: Many Ponzi-Like MLP Blow-Ups To Follow


anybody believe this or is it all BS?

[dan_s]

LINE and the other upstream MLPs are audited by large & respected public accounting firms. Honestly, do you think these firms don't look very hard at the accounting for hedges? Really, after what happened with Enron.

[dan_s]

This is a good analysis of my view on LINE.

http://www.fool.com/investing/general/2 ... is-st.aspx

My take is that the SEC has to take a look at LINE because of all the recent "noise" about its accounting for hedges and the size of the deal with BRY. How can they not? If the Short Sellers claims end up being true the SEC would get hammered for not looking at it.

LINE has real assets with great value, unless the auditors (KPMG) and the 3rd party reserve engineers are in on this.

[wilmawatts]

I never liked MLPs since the operator has a conflict built in with regard to operating the fields and acquiring properties to keep production steady and the fee they get to do so, and the fact that we have a depleting asset that may or may not with volatile energy prices keep payouts stable for investors. Then again, I was never that bright to begin with so maybe my concerns are overblown.

Lucky I missed Linn Energy. I have a whole bunch of folks emailing asking my opinion of the company and the sector. I am just telling them this is a game I don't play, and a ballpark I am unfamilar with.

But it is interesting all the 'Ponzi scheme' analysis versus the 'what a value this is' analysis that are popping up. Again, entertaining to say the least, glad I don't have a dog in the hunt here. Interesting to see the Wall Street folks march share prices up and down the field based on doomsday stories.

The short selling and allegations worked so well on LINE it would not surprise me to see more of the same with other players in the sector, unfortunately. Standby for volatility.

[dan_s]

While the BAML analysts said Monday they aren't attempting to call an outcome of the SEC's informal review, they did give a clear affirmation of the company's most controversial accounting practices.

"We do not believe LINN's stated distribution coverage would be materially impaired had the put strategy not been employed while we believe LINN's stated level of maintenance capital is entirely consistent with reserve replacement cost and peer company results for those operating in similar regions," the analysts wrote in their Monday note to clients.

Linn Energy has been criticized for capitalizing and not expensing the costs of put contracts it uses to hedge its oil and gas production. Since the derivative contracts are capitalized, they are not included in Linn's reconciliations from non-GAAP earnings before interest, taxes depreciation and amortization (Ebitda) such as DCF.

After a sharp sell-off in the wake of Linn's disclosure of the SEC's review, the BAML analysts upgraded the company's shares to 'Buy' from 'Neutral.'

[dan_s]

The BAML analysts lowered their price target for Linn Energy from $41 a share to $30 a share, citing the company's elevated risk profile amid investor scrutiny and an uncertain outcome of the SEC's review.

A handful of analysts downgraded their ratings and price targets for Linn Energy in early July, however, few expressed concern over the company's long-term earnings or its accounting practices.