The author apparently thinks he recognizes something that others don't, including the leaders of Berry who agreed to be acquired in exchange for stock rather than cash. For the sake of argument, if LINE have paid distributions that exactly matched its operating cash flow since its IPO in 2006, annual distributions would have averaged $2.20 per share, which would have been a yield of about 7.6% based on LINE's average share price over that period. A distribution of $2.20 versus a share price of $26 is about 8.5%, which is roughly equivalent to a distribution of $2.90 versus the share price of $34 before the recent pullback. In other words, the author provides a case for the current valuation of LINE.
My take is that these short sellers are attacking a grey area accounting practice that is not unique to LINE. Nor is the fact that many public companies pay out distributions in excess of cash flow. The rules for MLP's require certain distributions. These are legally made. In the oik and gas business earnings per share are often meaningless. Cash flow is king. operators drill week, get credits and legal deductions to allow for more cash to buy new acreage,drill new wells and develop existing ones. the alternative is to stagnate and pay taxes on earnings.
It is a sophisticated business that entails risk and understanding. SHort sellers prey on fear and using other peoples's money,and media,announce "new" fraud findings about a company that are neither fraudulent or new information.
I am surprised that Barron's got involved in this issue. There is something fishy there which will eventually surface. Someone in my opinion may have leaked some old "New" info about LINE to a Barron's reporter who wanted to make a headline and did. Just my opinion mind you.
Leon is no dummy. He is a smart investor. And the folks at Berry Petroleum are no dummies either. While it may appear that the shorts have an edge at this stage, my take is that LINE will survive this onslaught. Time will tell.
why not trash him. he deserves to be trashed
in february he posted an articel titled "will apple exist 3 years from now"
in may he had an article titled
Beware Long-Term Damage From Stock Market Bubble Forming Now
and in that same article says
I want to reiterate something I said at the outset of this series: Stock valuations are currently not symptomatic of a stock market bubble.
The author simply does not have the background to do this work properly.
LINE has grown organic production at a ripping rate.
But no effort was made to segment growth capital investment and sustaining investment.
In making this very basic mistake the author misses the concept of the cash conversion cycle at a capital investment level. In banking the concept of the 'sustainable growth rate' is well understood. Growth requires an expanding balance sheet to sustain growth and this is a use of cash. So rapidly growing companies can be reporting massive GAAP profits but be going cash broke.
It is simply is a misfire to make claims about period to period cash generation without addressing resulting increases in future production. A very basic mistake in concepts of cash accounting and the cash conversion cycle. However, this author seems to have made an honest mistake unlike the Hedgeye traveling circus. Hedgeye may or may not know better but clearly that is irrelevant to their operation.
Again with the hedging. LINE has grown very rapidly. To fast in my opinion resulting in the last quarter by mistakes made by a team stretched to thin.
We all know that the five year hedge book on natural gas was part of managements response to their conclusion natural gas prices were going to decline or perhaps collapse on the new technology. We also all know that the GAAP reporting requirements for hedge operations were a good attempt but fall far short.
All this focus on the hedge book was absolutely a winning strategy when the real weakness was ngl production is a rookie mistake as well. The real disappointments in cash flow came from expanding production of ngls which could not be effectively hedged due to inefficient markets and difficult delivery.
IN 20/20 hindsight yes management should have accept backwardization in pricing but markets look forward not backward.
This is the biggest flaw in this piece. It is backward.
"It is simply is a misfire to make claims about period to period cash generation without addressing resulting increases in future production."
For perhaps the first time, I have been thinking along the same lines as norris.
We may even be in agreement regarding the basic flaw in that article.
Also surprising is a post from norris actually logically addressing some substance rather than a lot of philosophical gobbledegook.
It's the same old argument that's been chewed over many times before, I don't feel like typing it all out again. Go back through the previous SA articles and the responses, it's all there.
I truly don't get the authors beef. If, in fact, some distribution is funded with equity issuance and/or debt, there is no problem with this legally and I have no problem with it as an investor because the stock has risen and the distribution over time has risen and the practice appears sustainable for years to come as they continue to grow.
Where does this guy think the equity and debt comes from? It comes from very sophisticated investors who know what the use of proceeds will be and they wouldn't be giving them the money, if they thought it was being put down a rat hole of unsustainable distributions supported by illegal accounting practices.
As for the capital accounting, the author says "IF" they are recognizing maintenance capital as growth capital that it's a problem. He stops short of saying they do. That's just hatchet work with no facts to support it.
Eeek! Exactly what the ALD investors said for the first part of the 2000s and then 5 years ago... BOOM! Sold assets to another company for 10% of PPS.
What is wrong with funding distributions from equity and/or debt... hmmm... Ponzi style scheme or just plain good business practice? LOL. How sustainable is that? Well, it's sustainable right up until you can't find a bigger moron to buy the new equity issuance or fund the debt.
These articles are bringing it to light now, so who will be the bigger idiot moving forward? Where will you find the bigger idiot? Hmmm...
I honestly couldn't read the entire thing - it was so full of childish glee over his catching Linn at something. There is no doubt that Linn has utilized DCF for two concurrent things - paying distribution and buying derivitives to make acquisitions safer. The point made by BAML and Cooperman and others is that DCF is accurate in that management could have chosen to do costless swaps or let it ride. So essentially another way of looking at it is they sold equity to fund acquisitions AND buy dirivitives on those acquisitions. When seen in this light, it's simply good business. When shown in the magician's misdirection, it's a short seller's dream.