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Linn Energy, LLC (LINE) Message Board

  • lexpress56 lexpress56 Nov 6, 2008 8:29 PM Flag

    Cato and Badbernanke; request for input

    I have a favor to ask and would appreciate your input since the two of you appear to be the most informed posters with "comparative knowledge" regarding the respective cash flows, asset values, coverage ratios etc etc of the various MLPs.

    In a nutshell, I want to hold Linn shares long term, but I have some early year gains in other equities that I would like to offset with some current Linn losses for tax purposes. So, in order to avoid the wash sale rule, I would like to (a) sell some of my Linn holdings to realize some losses, (b) purchase "replacement shares" in EVEP or BBEP or VNR, (c) hold those for 31 days, d) sell the replacement shares, and (e) repurchase Linn shares. I will obviously have 4 transaction costs, but the tax avoidance benefits are much more valuable.

    Consider all disclaimers issued and recognizing your input is simply an educated guesstimate, which replacement MLP would you recommend for the next 35 days as a replacement for Linn? I am not interested in trying to do better than Linn, I am just trying to figure out which alternative holding is likely to track generally along the same value path as Linn for the next month or so. If it were you in this situation, would you invest in EVEP, BBEP or which other entity as a 31 day alternative to Linn? Thank you in advance for your consideration of my request.

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    • cato
      thanks for you input but if you are trying to evaluate a new investment at this time- how much weight would you give to these differentials-that is what I'm concerned with. tia
      sc4

    • You are right that EVEP has a much lower percentage of production hedged than LINE, particularly for 2010 and onward.

      One thing to note though, is that their hedges for the outer years are at very high levels, e.g. $110 for oil. LINE has some lower hedges for some of those years, e.g. $70-80 for oil. This compensates for the lower volumes.

    • Sirs
      In evaluating EVEP versus say BBEP- how much improtance do you give tot the percent of future production which they have hedged. Line has hedged 100% of future production for two to three years while EVEP has a subsantially lesser percent hedged based on citi's reports
      I own a good position in line and wanted to diversify a bit but with uncertain energy pricing, it seemed that line which is fully hedged could be less sensative to continued low energy prices.Would value your views. TIA
      SC4

    • Thanks for the great info. in this thread guys, very informative! As far as options go, the only success I've ever had has been selling covered calls. Otherwise, I've managed to lose money on them. It seems like the only ones who make any $ are naked sellers with a big set. They are tricky business and a good way for newbies to lose a lot of money quickly. I think many of us have little worry about wash sales because we have plenty of real losses at this point to write off the max. for years to come:-) I tip my glass of Stout to you.

    • BadB, Cato, and Paul:

      I was out of town today and just got back to the ol' computer. Much to my surprise, I see a 13 post discussion on my request for information. Thanks to all of you for your input. I have block copied the chain to a saved email since there are many kernels of wisdom, tax strategy, cap gain-distrib-utbi inputs, etc that I will likely want to refer back to in the future.

      That said, seeing the strong correlation between LINE and EVEP performance and thinking by 31 day in and out window is during a dead-time (so to speak) between distributions and before year end, I am going to go the EVEP replacement route. I dont know if it is a "sign" or not, but the coincidence between both LINE and EVEP rising an identical $.69 a share today seems compelling (whether or not an equal rate of return). Anyways, I am off on my journey to wash sale avoidance with EVEP as replacement shares.

      If, by chance, there is anything significant I learn tax-wise from my little exercise, I will endeavor to report back later. (Of course, I probably will not be able to explain the nuances of the trade and related tax consequences as articulately as the rest of you). Thanks again for the input.

      Lex

    • << You both sound like accountants to me >>

      Or two drunks in a bar getting hammered.

    • Hi Paul. Yes, I think we are in agreement on the tax consequences. But you put it much more elegantly and you simultaneously tied the adjusted basis, loss allocations, capital gain and ordinary income threads together.

      I really would like your thoughts about this post:

      http://messages.finance.yahoo.com/Business_%26_Finance/Investments/Stocks_%28A_to_Z%29/Stocks_L/threadview?bn=27800&tid=5383&mid=5589

      Am I off base? Near the mound? In the bullpen?

    • The net effect is the same no doubt, but I like to think of the loss carryover "restoring" your basis to a figure representing the original purchase price minus distributions. Upon a sale, distributions are offset by any portfolio income passed through. As I think about that, it means that LTCGs passed through are a good thing since they're currently taxed at a max of 15% and ultimately offset distributions which would normally be taxed as ordinary income upon sale. Of course that also implies you lost the tax deferral on them.

    • You both sound like accountants to me. I'm a hammer and nails guy! But I enjoy (I think) reading the dialog. Thanks.

    • It looks to me as though Cato has hit the nail on the head with correlation of price movement between LINE and EVEP and I agree that EVEP is a more actively traded MLP.

      Options . . .

      If you want perhaps more direct correlation and aren't worried about LINE going above $20 in the next 31 days, you could consider selling LINE April 2009 put contracts at a strike price of either $20 or $22.50. The $20 has a bid/ask of $5.60/$6.40, so you could perhaps get it at $6 (I use limit orders on options where they are not actively traded, which is the case with almost all MLPs). A $22.50 has a bid/ask of $7.60/$8.50, a mid point would be about $8.10.

      After the 31-day period, you could repurchase the option position and buy LINE.

      I suggest April to increase the unlikelihood that the older will exercise the option before the end of the 31 days. If that were to happen, you'd have a wash sale issue.

      Essentially, the option should track LINE's up and down movements fairly closely, but not perfectly. If LINE were to jump by $2, the put would decline in value (the cost to close the put position) in fairly close tandem -- you would have a gain on the put closely paralleling the gain in LINE units. If LINE were to decline in value, the cost to close the put would rise in fairly close tandem and you would have a loss on the put very close top the decline in LINE's market value.

      The longer the option, the more time value, since time value erodes more slowly the longer the option period, the correlation isn't perfect.

      The bid/ask spread is also a cost factor that has to be considered, but if you were to wait 60 days, for example, the time value would decline and offset some of the bid/ask spread issue. Compare Jan 09 put prices with the Apr 09 prices and you will see how the January put rices are lower by nearly $1.00 compared to the $22.50 puts due solely to time value being less on the Jan puts.

      Of course, if LINE were to have a massive price spurt and rose above the put price, you would lose the excess over the put strike price, which is why you might want to use the $22.50 strike to give yourself more upside room.

      Clear as mud? Hope it helps -- obviously, EVEP is an easier proxy to use.

      • 3 Replies to badbernanke
      • If you want perhaps more direct correlation and aren't worried about LINE going above $20 in the next 31 days, you could consider selling LINE April 2009 put contracts at a strike price of either $20 or $22.50. The $20 has a bid/ask of $5.60/$6.40, so you could perhaps get it at $6 (I use limit orders on options where they are not actively traded, which is the case with almost all MLPs). A $22.50 has a bid/ask of $7.60/$8.50, a mid point would be about $8.10.

        **** slight flow here **** but agree mostly here is why
        I think if you are bullish you are better off doing a buy write since with put options you would not get the dividend of $.63 and if you sell out of the money say 22.5 calls and you would pocket the premium on top of the dividend.

      • And another point - any distributions you've received from LINE will be taxed as ordinary income when you sell while any loss will be limited to the difference between your original purchase price and sale price. Be sure to dispose of your entire interest in the MLP in order to apply any carryforward losses. Also, LINE may be passing through large Capital Gains to unitholders depending on how they treat their asset sales. However, you'll be getting those whether you sell or hold so that may not matter but it could up mess up your tax planning.

      • One more point -- enter into the put position before you close the long LINE position since using limit prices means that the order may not be immediately filled. It is easier to get an order filled for units. But to be sure no major movement occurs, the transactions shoul dbe as close to simultaneous as possible.

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LINE
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