June 10 Personal Finance Mag reverses July 2 SELL Flash, to BUY up to a price of $40!
Keeping it in their income portfolio with a buy recommendation up to 40!
Here's a direct quote oftheir closing paragraphs:
“Any time it chooses, Linn can monetize its entire portfolio of put contracts and re-hedge into costless swaps. Such a move would probably provide uplift for the unit price, by removing a primary rationale for swarming short sellers.
As for LinnCo’s potential tax trouble, valuations calculated by advisors to Linn and Berry included future liabilities. These valuations have been filed with the SEC. The midpoint of three detailed accountings for LinnCo calculated by Linn’s advisor was $39.64; the midpoint of three from Berry’s advisor Credit Suisse was $35.92.
As Linn noted in its statement announcing the Berry deal, “In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo’s tax liability will be in the range of 2 percent to 5 percent of dividends paid, which is the same as estimates provided in the prospectus for the LinnCo initial public offering. Therefore, this transaction is not estimated to give rise to any additional tax liability for LinnCo.”
The complexity of Linn Energy’s hedge accounting has been resolved with management’s commitment to using only swaps in future. Along with the significant production increase that will come with the Berry acquisition, not only is the present distribution rate secure but growth seems inevitable as well.
We continue to rate Linn Energy a buy under 40. “
David Dittman is an investment analyst at Personal Finance and chief investment strategist of Utility Forecaster, Canadian Edge and Australian Edge.
Let’s be clear that what Linn has done in the past is entirely legal. It is certainly more aggressive, but its practice of capitalizing its derivatives costs is within the law. Even Barron’s concedes that Linn’s accounting for hedges is properly reflected in Linn’s GAAP financials.
Linn has benefitted from a natural gas forward curve that has been in contango (natural gas futures prices are trading above spot prices). Rather than spending considerable sums for in-the-money puts, Linn has simply sold forward at a premium to spot prices.
Critically, in a recent 8-K filing with the SEC, Linn disclosed that “the majority [of puts] were purchased below the market. Out of more than 40 hedging transactions in the last 10 years, only seven were purchased ‘in the money.’ ”
All of Linn’s new hedges are costless swaps; the company has essentially traded a floating (or market or spot) price based on natural gas for a fixed price over a specified period. Management is no longer using puts to hedge its output.
What the heck, here's the beginning:
The Line on Linn
The longtime Income Portfolio holding has been under the gun in recent weeks. Here’s the real story behind the oil and gas producer’s predicament.
BY DAVID DITTMAN
Linn Energy LLC (NSDQ: LINE) has been in the crosshairs of the financial weekly Barron’s since a feature article in February questioned the company’s accounting with regard to its hedges.
Barron’s followed up in May and June with pieces that stated outright that Linn might be the most overvalued large energy producer in the US. The articles cast doubt on the company’s distributable cash flow and advised shareholders of acquisition partner Berry Petroleum Co (NYSE: BRY) to “think hard about approving” a deal with Linn.
Most recently in June, Barron’s highlighted a routine disclosure to the Securities and Exchange Commission (SEC) as part of the Berry deal and raised the specter of a potentially significant tax liability for shareholders of LinnCo (NSDQ: LNCO), a corporation created by Linn Energy.
LinnCo’s only assets are units of Linn Energy. Shares of LinnCo are the currency Linn Energy is using to acquire Berry.
According to Barron’s, “Linn may be overstating the cash flow available for distribution, by not deducting the cost of financial derivatives—mainly put options—from its realized gains on hedging activities in its quarterly results.”