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Linn Energy, LLC Message Board

  • rlp2451 rlp2451 Jun 26, 2013 1:09 PM Flag

    New SA Article:Added Debt Is Greater Than The Dividend Plus The Reserve Addition Value

    LINE's track record shows that it has been able to grow both reserves and production on a per unit basis, despite share dilution. Regrettably this achievement is overshadowed by debt increases that exceed the increase in measurable value. Linn Energy is borrowing more than the combined value of its dividend and reserve value-added.

    I am left to conclude that the company has had one good year in the last four and that the risk here is from a business plan that requires an increasing amount of borrowing to fund an increasing amount of capex each and every year. While it is obvious that management knows where and how to drill to increase production and reserves on a per unit basis, the business plan remains faulty because they have to borrow too much money to fund much of capex and all of their dividend.

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    • Rip, you will not believe this but when I read one of your posts I can tell if you are long or short:)

    • The issue isn't the gross amount of debt, because an upstream like LINE always leverages new equity into acquisitions, the debt part of the pie will always grow. What matters in debt to cash flow, and I don't see any issue there. All the upstreams are less levered to cash flow than they were in 2008.

    • LINE is not a royalty trust I'm not an expert here but I think royalty trusts buy an producing wells and pass the income and tax write offs (e.g. depletion, etc) to the investors.(see Wikipedia) When the Royalty trusts exhausts the oil they fold up. The returns are usually higher than of MLPs because part of the return is really a return of capital. MLPs, I think, retain some of income to buy another well; for example, if they borrow to buy a well they may not only make interest payments but amortize the loan.. Hence MLPs may have lower distribution than royalty trusts, but MLPs have a feasible long term business model. I'm simplifying of course, but that's my understanding.

      In addition the earnings are very lumpy. If an MLP makes a large acquisition, there may be a large start up expense to get the infrastructure in place. I don't trust analysis that just looks at numbers, especially numbers of a short period of time (anything

      Sentiment: Buy

      • 2 Replies to klee12
      • "LINE is not a royalty trust I'm not an expert here but I think royalty trusts buy an producing wells and pass the income and tax write offs (e.g. depletion, etc) to the investors.(see Wikipedia) When the Royalty trusts exhausts the oil they fold up. The returns are usually higher than of MLPs because part of the return is really a return of capital. MLPs, I think, retain some of income to buy another well; for example, if they borrow to buy a well they may not only make interest payments but amortize the loan.. Hence MLPs may have lower distribution than royalty trusts, but MLPs have a feasible long term business model. I'm simplifying of course, but that's my understanding."

        You got the general idea - I think a lot of the questions which are coming up with LINE boil down to this: Can the MLP model work for large E&P MLPs? Is LINE becoming too big to allow the model to be sustained?

      • Oops some got left out. to continue

        I don't trust analysts that just look at numbers, especially over a short period of time (say 10 years). The SA writer seemed to look just at 4 years data did not look under the hood.

        klee12

        Sentiment: Buy

    • if you believe that then you shouldn't be investing in any of the MLPs, they all need to build to grow and incur more debt to be able to increase distributions.

      • 1 Reply to purplespyderman
      • robin0635@att.net robin0635 Jun 27, 2013 12:13 AM Flag

        purplespyderman: You are absolutely correct - ALL MLP's need to acquire or build to increase growth; by necessity, they incur more debt in order to expand (whether by adding SPO's or adding debt) - Congress created these vehicles to increase investment in non-renewable resource areas (oil, gas, etc) and granted them special tax status to promote their creation and implementation... If you do not understand the basic thesis behind an MLP in the first place, then you really don't belong in these types of investment vehicles at all.. (and for that matter REITs either)... Each and every charge leveled by anti-Linn posters here and elsewhere can be leveled at each and every other MLP that exists...The seminal issues of import today, and for the immediate future, are:
        1) Either the MLP's managment makes added acquisitions or they are reduced or stopped; and
        2) Either the dividend is maintained or reduced or eliminated; and
        3) Either the accounting methods used are approved by the IRS or not...
        Not complicated issues to comprehend and each quarter the stockholders can make a determination on whether or not to continue to sell, hold, or add shares... No one holds a weapon to your head to buy an MLP...
        To date Linn's management is: 1) finalizing the acquirement of BRY; 2) the dividend has not only been maintained but set to increase and paid monthly; and 3) regardless of the endless discussions, Linn's accounting methodolgy is in full compliance with the IRS guidelines...
        Focus on the current BRY deal and what it does, or does not do, for Linn...
        GLTA

    • DON"T "trust intelligence."

 
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