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Linn Energy, LLC Message Board

  • fuzzhead72 fuzzhead72 Sep 3, 2008 10:57 PM Flag

    What is attractive about $2 billion in debt?

    I found myself looking at this company as a potential investment, but then noticed the 2 billion in debt, as well as the negative profit margin.

    Usually I look for companies with zero debt and a high profit margin.

    Why is this company attractive to anyone? Huge debt and lack of profits seems to be a recipe for bankruptcy in the long run.

    Am I missing something? Is the debt something that has been incurred recently as a short term cost of tapping the long term potential profits of oil?

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    • typical for pipelines and mlp

    • "Am I missing something?"

      Um, yeah. The debt wasn't recently reduced by about $700 million. What you saw probably doesn't reflect that. The neg. profit margin is an accounting apparition. Search other posts on this board about hedging and "mark to market" losses. I can almost guarantee you, there will be an enormous profit for Q3 this year. Probably on the order of $600 or $700 million.

      • 2 Replies to porciuscato
      • At 6-30-08, LINE had hedge liabilities of almost $1 billion, rperesenting approximtely what it would have cost LINE to close its hedge positions at that date.

        By 9-30-2008, those will probably be less than $250 million of hedge liabilities as LINE reports mark to market gains which offset most of the prior mark to market losses that GAAP requires MLPs to record.

        If you don't understand hedge accounting, you need to do more research to get adequately informed to understand financial statements under today's less than illuminating accounting rules.

        For that matter, financial institutions reporting huge losses often are "marking to market" -- often at $0 valuations -- perfectly good income-producing assets for which there is no available way to value under the accounting rules.

        Look for wise investors to make billions off these accounting abberations. Look also for the FASB to revisit its mark to market rules in th efuture now that those rules have been shown not to work.

      • Cato, I'm thinking you meant the debt "was" reduced by $700 million.

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