What triggered LINE’s plunge? News that the SEC is now investigating the company’s use of use of non-GAAP financial measures, its hedging strategies, and its proposed acquisition of Berry Petroleum Company (BRY) jointly with its affiliate, Linn Co, LLC.
According to the press release put out by LINN Energy Monday night:
The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.
For the record, Hedgeye Energy Analyst Kevin Kaiser has been all over the “Old Wall Street” aggressive accounting practices over at LINN Energy. Kaiser first sounded the siren back in February when the stock was trading around $38. It’s currently trading around $23 dollars.
We have been relentlessly banging the drum of transparency, and shining the light of accountability for all investors who bothered to listen. It has not been an easy road. All along, we have been attacked and vilified by various high-profile members of the mainstream media, big shots on Wall Street and angry people long LINN on Twitter. These attacks didn’t weaken our resolve. Rather, it strengthened our determination to get the truth out.
Fortunately, it now appears the market has come around. To paraphrase a line from Jim Chanos, “We are not the only guys crying in the wilderness” about the accounting at LINN now. While we certainly do not celebrate the losses of investors long LINN Energy, we do celebrate the market holding this company accountable. We don’t like it when companies play games. It’s bad for the markets and it’s bad for America.
For the record, Hedgeye believes this SEC inquiry puts the proposed LINN/BRY merger at serious risk. And yes, we believe the stock has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).
We’re not done with LINN – we think this story is far from over.
McCullough is a self-serving promoter. When I started questioning him on Twitter he blocked my account and I can no longer follow him directly. This is the same guy who loudly complained about Cramer blocking him and he turns around and does the same thing to me - obviously, he only wants positive comments on his Tweets and wants to silence the likes of me. lol McCullough wouldn't answer why, Brian McGough, the founder and president was no longer president and on some sights was listed as a former employee. He wouldn't tell me the size of the company or the number of employees in this 5-year old company. Look up smarmy and you'll find a picture of McCullough.
Could Linn’s yield go down? Yes, there is risk to its distributable cash flow, Stifel writes:
“While selling the put portfolio would shed some controversy, it would expose the company to the potential of falling natural gas prices. Therefore, we believe the company could enter into costless swaps to cover the sold put volumes. If this occurred, the company’s EBITDA and distribution cash would be under pressure and the company’s distributable cash flow would most certainly decline.”
Silly. If swap prices would be lower than what would be done with the intrinsic value in the puts?
Talk about mixing measures.
Hey how about selling off the puts and retiring a whole bunch of units at $22. Imagine that math!
From a stock research perspective, the last couple of months at Hedgeye have been interesting. Specifically, our Senior Energy Analyst Kevin Kaiser has been knees deep in a classic battleground stock: LINN Energy. Kaiser has done an immense amount of independent work on the stock and concluded that the Company is overvalued. In fact, our fair value estimates are more than 40% lower than the current stock price.
This research has raised the ire of the Company’s management who has publicly refuted our thesis, has led to numerous ad hominem attacks from the likes of Jim “The Entertainer” Cramer, and also led to a letter to the editor of Barron’s from a large hedge funds that has accused the short sellers of LINN to be “unprincipled”. (Ironic from a hedge fund that routinely shorts securities.)
Now, admittedly, when we think we are on to something we tend to go all in. In this instance, that included presenting on the idea a couple of times, participating in the Barron’s article, and publicly defending our research and our analyst. To Larry Bird’s quote above, if you are not going to defend your ideas and your teammates, don’t bother coming back to Hedgeye headquarters.
Late last night, we were rewarded for our hard work as LINN Energy announced:
“… that they have been notified by the staff of the Securities and Exchange Commission ("SEC") that its Fort Worth Regional Office has commenced a private, non-public inquiry regarding LINN and LinnCo. The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.”
Now to be fair, this is America, and certainly the Company is innocent until “proven guilty” by the SEC, but nonetheless this was part of our point in warning investors that some of LINN’s practices were likely to attract the scrutiny of the SEC.
As always, though, Mr. Market will ultimately let us know if we are correct in our research on this name. After all, in the short run the stock market is a voting machine and in the long run it’s a weighing machine.