Book Value does NOT equal a property's real value. I own rental property that has a book value of $223,000 and produces $60,000 in rental income a year. Only a brain dead idiot would sell an asset that produce $50,000 in NET income a year after expenses for $223,000. So since Barons thinks an asset is only worth its book value then they are either really dumb or trying to deceive readers into believing false and misleading arguments
No, you do not understand what book value means and that was his entire point. In fact it was his first sentence - 'Book value does not equal a property's real value'. That is correct. Book value equals purchase price minus depreciation/depletion.
Now if he were to sell that property, say for $1 million, then the book value for the purchaser is now $1m. It's exactly the same property but overnight, due to the sale, the book value could jump to 4 times higher. Now do you understand that what the original poster said is correct. Book value is not intended to represent the current value of the asset. If you try to use it for valuation purposes you are misleading yourself.
This begs the question as to what are the net assets worth. Linn was founded in 2003 so it is not like they have assets that are 50 years old. Many of these assets were acquired when NG prices were significantly higher than they are today. Yes Linn hedged the future production, but there are practical limits as to how far forward hedges can be made, so over time these higher priced assets have had hedges that are at lower prices. Assets that have been acquired since 2008 were purchased at prices that reflected the lower NG prices but unless Linn does something to increase the cash flow generated by these assets, they are not likely to be worth significantly more than their purchase price since NG prices have not significantly increased. So why has Linn been trading at prices above book value? Part of the reason is the MLP structure they have pays higher dividends than normal corporations that have been highly valued due to low bond interest rate alternatives and because the cost of debt available to the company to finance growth has been relatively low. Since Linn pays out most of its operating cash flow in the form of dividends, it is dependent on debt and equity issuance to fund its growth which of course is the source of increased dividends. The market anticipates that interest rates are going to increase due to expectations the FED will begin to raise interest rates soon. This expectation makes MLP's high dividend rates relatively less attractive and increases the cost of debt that finances future growth more expensive for the company, reducing investors expectations for future dividend increases. The concern with Linn is compounded by the flat production rates Linn has experienced since 3Q 2012 in spite of the acquisitions they have made. So if you believe that Linn will get back on track with production growth, NG prices will go up in the future, and the FED will keep interest rates low Linn may be worth more than book value. Barrons disagrees.
LINE states on their web site:
Internal NAV analysis implies an equity value of $44.74 - $64.74 per unit.
Third-party advisor analysis (as documented in the proxy) values LINN at $37.34 - $51.15 per unit.
NAV derived based on proved and unproved oil and gas assets.
And of course you know MLP's pay distributions from DCF, and not a dividend.
And moving forward into the future, LINE being an upstream MLP will need old declining oil fields in the US to be able to have future production. The last time I looked oil production in the US has increased dramatically from new oil fields that new drilling technology has unlocked. Hence the properties LINE can acquire in the future is increasing.
So, yes Barrons disagrees and has aided shorts in crushing the share value for now. I see an excellent risk vs reward opportunity here.
I did rather well shifting my investments from Southern California Real Estate to KMR in 2004. So I do have some knowledge of MLP's and their valuation. aka current DCF, projected growth rates, and relative interest rate
"Barron's" only goal is to sell advertising space. That's how they make their money. The articles that surround the advertising are nothing but filler. This is true of all magazines and newspapers.
In order to attract eyeballs to their ads, they need drama. Nobody reads a newspaper that says, "Things today are about the same as they were yesterday, and not much is happening that's very exciting." (It would be like trying to get someone to pay for the weather report in southern California: "Well, it looks like it's going to be 70 degrees and sunny today.")
By their nature, the financial markets don't have all that much drama -- certainly not enough to fill two full-time cable channels and a bunch of websites, magazines, and newspapers. There are a few individual events that punctuate long boring periods where not much is going on.
So the folks at "Barron's", CNBC, Bloomberg, Seeking Alpha, Motley Fool, Cramer, etc. -- all go out of their way to create drama, excitement, scandal. Just so they can sell advertising. I'm sure someone at "Barron's" is quite aware that book value isn't a good measure of value, but so what? But saying that wouldn't be much of a headline.
You're putting yourself in danger if you trust your financial wellbeing to what these people say.
Barrons has become the National Inquirer of the financial world. Sometimes their stories are right but sensationalism is their theme. They seem desparate for stories in light of the number of stories they have posted about Barrons.
You can say what you want about Barron's save wrong about LINE. LINE has become the National Inquirer of the MLP space with sensational accounting. I would actually argue Hedgeye is even more sensational as they have impugned several other mlps without a shread of evidence. BBEP & QRE have issues but accounting is not one of them and they have been savaged by this rotten scare monger.