Shorter Bronte Capital..Linn Energy: that did not work so well..
Friday, February 22, 2013
Linn Energy: that did not work so well
From the original 8-K which triggered this series of posts:
Fact #1 – LINN is confident in the validity and accuracy of its audited financial statements.
Drolly I note that for 2012, the company reported net loss of $387 million, or $1.92 per unit. For the quarter the loss was $187 million. (Source here.) Obviously a good part of this loss was write-downs from writing off oil and gas properties that became less valuable as gas prices fell.
However there should be an offsetting write-up in the value of the hedges so that defense will get only so far.
Whatever: unusually for a stock I write about in Linn's case I (mostly) believe in the validity of the accounts. The accounts say quite bluntly that
(a). This is a loss making enterprise.
(b). That this business pays out large and increasing distributions despite those losses and
(c). The business raises ever increasing amounts of funds using ever-more-novel ways of doing it.
To me that looked like a Ponzi scheme on its last legs. Indeed to come to a different conclusion I thought you had to accept some non-standard non-GAAP measures as reality. In other words you have to ignore the audited bottom line for the company.
Many people it seems do ignore the bottom line. They are encouraged by the management - and they might be right - but for the moment I have (and retain) a different opinion.
But I was wrong
Despite not changing my opinion on the fundamentals of Linn I will confess to being wrong on one important (nay critical) point.
When Linn launched Linco (their non-MLP associate which exists only to hold interests in Linn) I thought the money-raising was on its last legs. Specifically I thought that rather than target the non-sophisticated mom-and-pop investors who buy MLPs they were being forced to target more sophisticated investors as they had run the non-sophisticates out of money.
I thought LinnCo meant Linn was on its last legs.
I was wrong. Spectacularly (and unprofitably) wrong.
Yesterday (as many will have noticed) Linn used Linco stock as a currency to buy a C-Corp - a very big acquisition - their biggest to date.
I did not see it coming. It was not even on my original list of risks in the position. Wrong!
This is a great deal for Linn. They get to swap what I believe to be near-worthless stock for some old - but still valuable oil assets. Those assets will generate cash - cash that can keep this whole thing rolling along for a few more years.
So even if I am right that Linn is a Ponzi (and many company supporters disagree with me) it is not a Ponzi that will collapse next week. And so my opportunity to profit will not be next week.
I covered most of my short.
For a loss.
PS. The company now has some time to prove that it is not a Ponzi. Substantial GAAP profits might be a start - but hey - ten more years of distributions would also be effective.
I enjoyed reading what the big shorter had to say, but without the use of quotation marks and clear attribution, reading the post was a challenge. I find this to be common in many posts. Don't know why.