We read with some interest Leon Cooperman’s letter dated June 17, 2013 to Barron’s Mail Bag that suggests your reporter Andrew Bary is in the “vise of a small group of unprincipled shorts on LINN Energy.” Frankly, as someone who has been professionally short selling stocks for many decades via his firrn Omega Advisors, we are surprised that Mr. Cooperrnan Would characterize short research in this manner. We find it unfortunate that the “debate” on LINN Energy has descended to the level of ad hominem accusations, but we believe your readers recognize that such allegations do not change facts.
As it relates to LlNN, we can debate and discuss the merits of our analysis and compare our independent valuation to the valuations of investment bankers that stand to get compensated by the consummation of a transaction between Linn Energy and Berry Petroleum. Or, we can simply follow the cash flows.
According to L[NN’s statement of Cash flows in its 2012 10-K, the company generated in total $1,141 million in operating cash How from 2010 - 2012. In the sarne time period, LINN spent $1,898 million on capital expenditures excluding acquisitions. So, in aggregate, LINN`S free cash ilow (at least by the most direct definition of operating cash flow less Capital expenditures) was a deficit of $7157 million for the period. Despite this free cash flow deficit, LINN was able to pay out $1,429 million in distributions to unitholders from 2010 2012.
How is Linn able to pay out substantial, regular distributions despite an operating business that clearly does not support them? This is the fundamental question our research asks, and we believe that it is primarily via financial engineering, capital raises and serial acquisitions. Sooner or later either LINN will run out of money to fund acquisitions, or it will run out of targets to acquire. This seems obvious.
There is dispute about accounting issues. Raymond James has a SB on LINE with $44 target; Wells Fargo has an outperfom with target of 42, and Stieffel Nicholas has Buy with target 48. Leon Cooperman and Jim Cramer find no problem. I have read the Barrons article and the rebutal by LINE on their website. The only negative articles I have been able to find about LINN are, Barrons. this message board, and Hedgeye on their site.
I have studied the accounting and other issues and side with Raymond James et. alia. I will not rehash the accounting dispute. But I will point out that I have put my money where my mouth is. My position in LINE is over what I would normally invest in one company. Those who feel differently should put their money where their mouths are and sell LINE short. My posts on this point are intended to be informational and not ad hominen.
Like Mr. Cooperrnan, We too have spent years on Wall Street. Thus, We recognize that there are multiple interlocking interests at stake over the pending $4 billion acquisition of Berry Petroleum. Contrary to certain allegations that have been fired across our bow in the media, Hedgeye Risk Management does not manage any money, nor have we undertaken any research on LINN “on assignment” or at the behest of any firm or
individual. Further, in the spirit of transparency, We have invited the management teams of both LINN Energy and Berry Petroleum to review our work.
We are convinced that LINN’s distribution is ultimately at risk, though we admit it could stay intact for some time. But we believe those »80% of LINN shareholders that are retail in nature and don’t have the crack research team of a major hedge fund like Omega Advisors should have access to analytical Work that discusses what may be meaningful risks to their investment.
Hedgeye Risk Management stands behind its work on LINN Energy. As with our work in the past, we believe we have been thorough in our analysis. We are confident that we are right, and we have yet to see any data and/or analyses that refute our arguments.
Feel free to contact us with questions.
Before you continue to make a complete #$%$ of your company and your reputation, it might be a good idea that your understand the terms "free cash flow" as it relates to Line energy's ability to continue to fund their distribution. You are missing or not understanding the basic methods for determining that number. Both sides of this argument can't be right and I choose the mgt. of Line energy and other outside analysis who have confirmed their good name and business practice. Who are you guys anyway? Never heard of you before this week.
Thank you for posting that, now I understand the meat of their argument, and why it's so incredibly naive. They're calculating cash flow as if all the development costs incurred, a couple of billion worth, should be treated (in essence) as maintenance capex, while respecting "acquisitions" as if they were somehow different. But that's complete nonsense, because in this context, there is zero difference between buying a property and creating new production on an existing property through a major capital program, none.
Yes, one must believe LINE management is telling the truth in their classification of maintenance capex, which resulted in 1.07 coverage for 2012, but the point is that Hedgeye's "crack" research is worthless if they were unable to delve into that cash use category and (possibly) rebut management's assertions. But they didn't do that, their research stopped at the door. Which makes it completely irrelevant. Amazing they don't seem to understand that essential fallacy, I picked it up in a couple of minutes after reading the above. Stunning, this resulted in over a 20% move in the unit price, for nothing . . . nothing!
"Contrary to certain allegations that have been fired across our bow in the media, Hedgeye Risk Management does not manage any money, nor have we undertaken any research on LINN “on assignment” or at the behest of any firm or
This is a very carefully written statement implying that they do not have any financial interest in being short linn energy. NOTE I said implies This is NOT yo9ur standard disclosure of no position.
rlp: The following quote sums up the entire Hedgeye's position - "... we admit it could stay intact for some time..." - nice caveat and admission for the short-term, pre-merger agreement timeframe...