I am trying to get a handle on this issue so please bear with me.......... If the puts are expensed in the quarter they are bought that should be a straightline expense and immediately decreases DCF (distributale cash flow). If the puts are capitalized .....then the expense is written off over time and the immediate expense is much less increasing current DCF. Does anyone know what the time frame of the depreciation is? Do we know for sure that the puts are even fully depreciared (expensed) by the strike dates? Also........if Linn does depreciate their puts over their life span but in the mean time quidkly buys new properties and buys puts (rinse and repeat) would that not drive up current DCF in a rather artificial way as the immediate gain from buying the puts would be larger than the amount of depreciation (expense) taken in that quarter hence increasing apparent DCF? Comments please....all are appreciated.
IIRC LINE amortizes the hedge over the life of the hedge. I don't see anything wrong with this. If they are amortizing the edge, then every quarter they are expensing all previous hedge.
Great post I would add that once again Barron's made a silly comment about GAAP treatment of the out premium cost.
It is expensed on the income statement.
DCF is not a GAAP measure in and of itself. So taking the comment of a CPA was more transparent monkey business about not including put cost in the DCF.
The important thing here is that the expected distributed cash flow going forward is not impacted by this in anyway. Management is going all swaps so there is no necessary sustaining capital going forward which would lower DCF due to put purchases.
Management at the WSJ Service really should look at this. A negative piece easy could have been done with some journalistic integrity. But this is clearly not journalism or even plausible fair negative opinion. At this point the sunk cost in the puts does not interfere or lower expected DCF going forward.
This is actively attempting to scare rather than inform investors. Shame. Barrons had a great reputation.
The puts are "accounted" for as they pay off their debt.When they acquire they buy puts to cover perhaps 10-25% of production with borrowed money(their theory of accounting) .This cost of paying off the debt is deducted in reaching DCF.They have done nothing wrong GAAP or in accounting for DCF.Critics want them to expense the puts when bought.Others say the puts must be amortized over the time period they cover.Linn includes puts in the purchase price and as they pay down their debt the cost is realized.If you use the critics accounting methods Linn has a problem with coverage.But their model is working fine and DCF is calculated in the same manner as most other MLP's in this regard.So the critics don't believe in the MLP upstream sector.Just my 2 cents worth -fire away
Forgot to add that the D/EBITDA ratio after the merger would be about 3.5 so-it appears to me that Linn's model of borrowing to buy the puts when acquisitions has not over-leveraged the company.It has worked for the last 7 years.