There are two opposing views, one side saying the shares should be in the low 20's and another saying the shares should be in the 30's. This has lead to some rather harsh comments towards those who published a more cautious view. There are also at least two ways to estimate a value for the shares.
First way is to just look at the stream of distribution payments per unit, and even forecast some increases, then discount the cash flow back to the current present value. Then yes, one can calculate an estimate for the share price in the 30's rather easily.
The other way is to compare the company assets, earnings, and return on equity against other natural gas companies. When this is done, one can calculate an estimate for the share price in the very low 20's easily. There are many harsh words directed to Hedgeeye and Barrron's, but I have not seen anyone show good reasons why they did not apply this valuation method correctly. Nobody could ever sue them because all they would have to do is just hand their calculations along with a relevant text book over to any lawyer. Similarly, one can look at the S&P Capital IQ report showing a fair value calculated in line with Barron's at a fraction of the current share price. However, people are not angry with S&P because the report is only available to those willing to pay the 69$ price, and it has not been quoted much online or in the media.
What people should at least be willing to think about, is which method is more likely to be the most accurate in the longer term? I still have to consider this more myself, but when I look at the share statistics section of the yahoo summary page, I find it easier to agree with Barron's, when I see statistics such as:
Trailing P/E: N/A - in other words it's negative
profit margin: -25.60% - way negative
return on equity: -11.82%
Net earnings: -498 million
diluted EPS: -2.21
Sorry to say but my view so far is that today was a display of recklessness and wishful thinking...
I know one thing. Berry Petroleum management is not stupider than a box of rocks. They have been good stewards of shareholders' wealth. I am sure being in the same business they have gained a high degree of comfort with LINE's accounting and ability to pay the higher distribution amount of $3.08 per annum AND.... HOPEFULLY.... some dcf coverage meaning LINE will not be paying out 100% of dcf.
Berry is in the cat bird's seat and if they didn't continue to want this deal they have had numerous opportunities to walk away in the past few months.
I am not a big E&P MLP fan but I detest these bear raids by investors that profit by scaring the bejesus out of everybody. We need individual investors back in this market and this whole process involving LINE has been shameful and discredits the entire investment community that is willing to engage in scare tactics to make their 2 plus 20.
so keep on shorting sell your house and use the money to short the stock take every penny you have and short line do you have that conviction if you don't then what are you talking about
bulls on this stock have showed their commitment and have held on or even bought more if you are so sure that lines valuation is overvalued put your money where your mouth is cmon tell us how much more are you shorting or are you just trying to make happy people miserable
Here are not two but four different valuation scenarios for Linn. As of this morning, we have eliminated the first three, but these three were influencing potential buyers and holding down the share price for the last two months:
1. No Berry merger, revenue falls, and SEC problems
I always thought the SEC part was bunk, as the issues were non-GAAP, but that was how you could get to Linn at $18 to $20
2. No Berry merger and bad news:
NGLs keep going down, pipeline curtailments continue, production continues to decline, Linn cuts distribution: Line $22 to 25
3. No Berry merger and some or a lot of good news:
NGLs go up in price, pipeline curtailments ease, production rises. Maybe Linn strikes it big in Wolfcamp and Bone Springs. Maybe chaos in the Middle East. Line $25 to $27
4. Berry Merger and good news:
NGLs go up in price, pipeline curtailments ease, production rises. Berry merger exposes Linn to oil prices, reduces costs, reduces Linn's debt leverage. Line $28 to $32
Now the bulls can tell me how to get higher than $32. Maybe the Monterey formation turns out to be spectacular, and the Bone Springs well is huge, and there is a full scale war in the Middle East. I can certainly imagine things that would take the new merged company higher.
Feel free to provide your own valuation scenario. This invitation extends to the doomsayers too.
Ok, but if it does get to 28 to 32 how does it stay there when it may be paying an unsustainable distribution. Also consider that it has about 60% debt to market cap, and interest rates have doubled to 3% in the last two months. The interest expense can start to cut into the distributions.
The mistake you are making is the same the guy on SA made in his comparison of depreciation of wells to depreciation of trucks. -- you assume that depreciation of oil and gas wells is the same thing as proportionate reduction of oil in the ground. People like you are always baffled that valuations of oil companies ignore the P/Es and focus on productioin and reserves. All the depreciation of gas wells in the Eagleford in the 90s became irrelevant when they figured out how to drill the shale oil formation underneath.
Imagine a department store depreciating its building and equipment, and then it digs a hole in the parking lot and discoveries a huge chunk of merchandise just lying in the ground and as good as new and immediately sellable. Oil companies are different, and I have seen so many shorts get killed using valuations based on P/Es.
I am a very cautious and timid investor and today's gain in Linn had nothing to do with recklessness and wishful thinking. I have to say that I do not think that the merged company is worth $40 but since I have not really dug into Berry yet, maybe some one can throw out some numbers and convince me.
Linn will go up more tomorrow, probably to $30 and probably on good volume.
Yes but if you include production and reserves in the comparison it looks even worse. Linn has the lowest reserves and number of wells by market cap. P1 reserves are 4,796 billion cfe, with 235.2 millions shares, so that is 730 cubic feet of gas reserves and equivalents per dollar of market capitalisation. EnCana has 1019 cfe/$ market cap, and after CHK having a recent rally it still has 898 cfe/$ market cap. So they will buy more reserves by increasing debt at a time when interest rates are going up, which introduces more risk, etc.
I expect Linn to rise again tomorrow as well. And on Friday we have a payday. Then another payday in mid-October before the Q3 results are released on 21 October - Q3 results which I believe will exceed expectations. And finally, we may get an additional bump upon news that the shareholders have approved the merger. Linn management is doing what they need to do. Kudos.
Well, given that the stats you cited are all based on GAAP, which is virtually irrelevant to an upstream, I'd say you might want to learn a little about upstream MLP's first, and then weigh the opinions.