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Linn Energy, LLC (LINE) Message Board

  • derivative5150 derivative5150 Feb 19, 2013 9:46 AM Flag

    Umm...Financial Analyst Needs Accounting Lesson???

    So, according to the Barron's article, the analyst that recently downgraded Linn stated that the Linn management inflated distributable cash flows by not including expenses for the company's derivative portfolio in the gains received from said portfolio that were ultimately apart of the distributable cash.

    I'm confused...if they realized gains, and thusly realized cash at time of the derivative's fruition, why wouldn't they realize an expense, and thusly a reduction in distributable cash at the time the derivatives were put in place? Doesn't past expense activity already remain inclusive in past distributable cash balances?

    If I buy a hedge last year for $100, and I report distributable cash flows for the next five or so quarters, that first reported quarter should include that $100 cash expense...correct? If I sell that hedge or make a gain on it of $50, that gain in total is my ultimate cash that would be included for distribution in that quarter, and I wouldn't continue to include the cost of my hedge in a cash sense...correct?

    It seems to me, the analyst is trying to meld GAAP with cash flow, or cash basis accounting. Am I wrong? Any insight would be greatly appreciated. GLTA.

    Sentiment: Strong Buy

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    • The issue right now is not the accounting, even the analyst who raised questions gives them a $36 target.
      The issue is how much people will pile on in the short run and hurt the stock, and what this will do in the ling run to their ability to borrow.

      • 1 Reply to fwb54
      • I disagree...the entire reason for the analyst's opinion as well as the Barrons article was due to Linn's possible mistreatment of their derivative portfolio's costs in relation to their distributable cash flow. That is a LONG case issue, althought I don't think it's an issue at all.

        In the SHORT term, the next distribution date will create more interest in owning the stock, driving up its price as always. It will be back at $38 in a month.

        Also, don't you think Linn has accountants that perform its audit and reports to the SEC? Maybe those accountants don't know anything either. GL.

    • Maybe they have to spread the cost of the hedge out over the life of the hedge. But, even that would smooth out over time and a constant hedging program.


      • 1 Reply to keltus1952
      • True, amortizing the cost over time is a GAAP concept, but the cash outlay initially is not. That would be like saying I bought a bulldozer, and each year I would report a specific portion of depreciation expense as well as a cash outlay for that equipment. I just think both the analyst and Barrons haven't thought through the accounting transaction that occurs on a GAAP basis, vs. a cash basis.

    • Neither the analyst nor Barron's has a good grasp of GAAP vs. non-GAAP accounting. If they have an issue, they should take it up with the the SEC, not individual companies.

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