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Linn Energy, LLC Message Board

  • Brennus01 Brennus01 Mar 6, 2008 6:49 PM Flag

    Clearing up some misconceptions

    Although LINE is a fairly simple entity, it is often misunderstood. Many, many people don't know what the heck a PIPE share is & how it works.

    All PIPE shares have enjoyed full distribution rights since they were issued. So, for the PAST FEW PAYMENTS these units have gotten the distribution. Their unregistered status only limits how the holders can trade them. Not how they vote the units...not how the units are entitled to distributions.

    So the sentiment that since the shares have become freely traded there will be a decrease in the ratio of distributable cash to distributions paid is a gross mischaracterization. It's just false.

    Also, there is the falsehood that the distribution is in danger. Or somehow not secure. This is, again, a completely false assertion. The distribution is secured by almost completely hedged production. A significant portion of those hedges are puts well below today's commodity prices.

    The only way the distribution won't get paid for the next several years running is if there is some large natural disaster in the mid-continent. Or if counterparties to LINE hedges can't honor the contract AND commodity prices plunge.

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    • reits and mlps always move in and out of favor and last summer was their peak and this summer feel like it may bottom as liquidity concerns are likely to ease by then.

      further, the BSR index has been in a tight range since last august and appears to have been consolidating with support at the 32 level although the index hasnt been around long enough to be that meaningful.

      spreads have widened to incredible levels and while there could easily be some more pain over the short term, these spreads are forced right now and are unsustainable for credits as strong as linn

    • to valueguy, you asked what would be a good buy long term? Subjectice question so here is my final thought. KFT, Runners up were T,BAC,DUK and ABI. All for different reasons.

    • Just curious--what is the basis for your time horizon of more than one year before the MLP,LP decline is stemmed? Why wouldn't you wait to buy until the decline is stopped?

    • You are absolutely correct in saying that the GAAP losses have been incurred already and I certainly did not mean to imply otherwise.

      But the put positions have lost so much "value" that to close them would yield way too little cash to pay for a "rehedge" -- so to do a pure "rehedge", the company would have to come up with immediate cash -- a whole lot of cash, probably to the tune of millions of dollars. The hedging losses on GAAP mark to market are in the neighborhood of $400 million and some portion of that is the puts.

      The existing put positions don't expire "soon" in my book -- they run through 2011 for regular puts and 2012 for the PEPL puts and apparently cost many, many millions of dollars.

      The puts protect downside risk, they don't enhance the upside. So while "rehedging" might increase the downside protection, it would with absolute certainty decrease the upside potential the company already has by simply standing pat (again, assuming prices remain elevated) because the hedges won't increase revenue in a rising commodity market but would definitely increase costs.

      No one knows where prices will be in two to four years, but I think I would opt for leaving things where they are and letting the upside pay off to the extent it develops.

      To me, management made a smart bet to the upside with puts and should let it play out.

    • not sure that's accurate. they already take the non cash loss based on value of puts and the loss if they rehedge would still be non cash. they would need to pay to buythe new puts which is why i made the analogy to paying a point to refi a mortgage.

      the puts were paid for at some point for cash. they will never lose more cash than that. they have been taking the "non cash" losses every quarter. these puts expire soon anyway so they should rehedge in an effort to help the unit price

    • That makes sense, bad.

    • Just a brief note. LINE really can't "rehedge" at the moment, certainly not the swaps. They would turn the "paper loss" into a real cash loss. The only way to recoup the cash cost of closing the positions would be to enter into swaps that go much longer out in the future.

      Since the swaps were intended to protect their cash flow on the downside, they probably will (and probably should) just sit on the positions and renew them as they expire to cover future time periods.

      The puts are a similar story -- their value has declined drastically, so closing the positions wouldn't add much to cash flow and buying higher priced puts won't guarantee greater revenue (since the market is already elevated above the current put strike prices in the near-term), but would certainly increase hedging costs and thus potentially adversely affect cash flow if prices stay elevated. If management thinks prices will stay elevated (as many posters here believe), that would not at all be a wise move.

      Sometimes one should just stay put (to use a horrible pun).

    • this is a one in a lifetime buying opportunity so dont get stuck in the weeds by focusing on their derivatives. you need to see the forest through the trees ...stevie you and valueguy need to get on the same page, you are saying that the derivatives do not matter then he points out the are up 40% on oil puts. Once again I am not bashing LINN and you both seem to think I am a day trder or something.

    • first off, Line isnt the only MLP going down. there is a delveraging process occurring which is bringing down the entire sector. Has nothing to do with Line, the puts, where nat gas is, etc. The funds that control MLPs are selling as part of a de-levering process.

      Second, Line could easily break the hedges and "re-hedge" at these levels. its like paying a point to refi your house. its something they might do if its compelling enough but that wouldnt necessarily stop the selling pressure as spreads for all yield intruments widen. Have you seen Fannie Mae and muni paper lately????

      so if you cant hold for a year (at least) then maybe its best you sell. the price action of MLPs has VERY little to do with nat gas prices right now. fundamentals arent driving these right now.

      i will buy more as it falls as i have no reason to sell for several years and getting paid 12% isnt bad. stock will be at 30 before you know it.

      this is a one in a lifetime buying opportunity so dont get stuck in the weeds by focusing on their derivatives. you need to see the forest through the trees

    • You haven't read that they capture 40% upside of oil price from their puts...You tell me then smart guy what a good investment in this market? Me buying line at $20-25 is just fine due to the NAV, long life reseves, rising oil and gas prices (think long term, swaps and put roll over to higher prices,) tax advantages....blah blah blah,

      If you bought at $30 that such but you have the opportunity to average down, increase the bended yield,....

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