For our money – more importantly, for yours – we say LINN has not addressed the issue of Free Cash Flow. There just doesn’t appear to be enough for them to reliably keep hitting the targets they keep setting when they announce guidance of what next quarter’s distribution to unitholders will be.
To review, we raised four fundamental issues in our March 21st call – and we added a new one today:
1- Not enough Free Cash Flow (FCF)
2- LINN’s unusual accounting for its options hedging gives them dollar-for-dollar credit for what they spend as cash available to the company
3- The “Maintenance CapEx” metric is not even appropriate to this kind of company, and it understates the actual costs of m the business
4- Thanks for the second look: on re-examination, we have lowered our valuation for LINN shares. On March 21st we were willing to give the shares a fair value of around $15. We now think it may be as low #$%$
5- New item: LINN may be providing misleading calculations of how it values its acquisitions. We believe this continues to inflate the reported value of the company, and is part of the reason we have lowered our valuation
Here are some key points we re-emphasize from our first presentation – points that we believe LINN’s April 1st response did nothing to clarify.
Adjusted cash flows from operations: our analysis of LINN’s DCF (Discounted Cash Flows) calculation indicates there was a $1.047 billion cash shortfall over the 2009-2012 period, being the difference between what we calculate to be $686 million in actual free cash flow, and $1.732 billion paid out in distributions.
When we net out the treatment of option premiums, the numbers get worse. The cash shortfall over the period doubles, to $2.165 billion.