Bull Market Report. Sorry to say it's not good for shorts
II. Linn to Change Terminology
There were some interesting tidbits in the latest S-4 filing from Recommended List selection Linn Energy (LINE, $26.97, -0.94, Spy) filed today.
The MLP will no longer use the terms "distributable cash flow (DCF)" or "maintenance capital." Instead, they will be replaced with "available cash" and "discretionary reductions for a portion of oil and natural gas development costs."
The company said the latter term "represent[s] discretionary reductions for a portion of oil and natural gas development costs, an estimated component of total development costs, which are amounts established by the board of directors at the end of each year for the following year, allocated across four quarters, that are intended to offset natural declines in LINN’s existing cash producing assets during the year as compared to the prior year. The portion of oil and natural gas development costs includes estimated drilling and development costs associated with projects to convert a portion of non-producing reserves to producing status. However, the amounts do not include the historical cost of acquired properties as those amounts have already been spent in prior periods, were financed primarily with external sources of funding and do not affect LINN’s ability to pay distributions in the current period. LINN’s existing reserves, inventory of drilling locations and production levels will decline over time as a result of development and production activities. Consequently, if LINN were to limit its total capital expenditures to this portion of oil and natural gas development costs and not acquire new reserves, total reserves would ultimately decrease over time, resulting in an inability to maintain production at current levels, which could adversely affect LINN’s ability to pay a distribution at the current level or at all."
Thanks, A refreshing, sane assessment by BMR of the changes spelled out in the S-4 Amendment. Christ! The garbage that's flying around elsewhere (SA, Hedgething for example) is unbelievable (literally). It's truly sad how so-called financial analysis and journalism have become so prostituted.
Adjusted EBITDA will also no longer include adjustments for cash flows from acquisitions and divestitures between the effective date and the closing date and the company will deduct the premiums paid for put options that settled during the period. It will also not use adjusted EBITDA as a starting point to determine distributions. Instead, it will start with the GAAP measure of net cash provided by (used in) operating activities.
The company provided a new table showing "Excess (shortfall) of net cash provided by (used in) operating activities after distributions to unitholders and discretionary adjustments" for the past three years and for three and six months this year and last year.
Notably, the "coverage ratio" numbers presented didn't change, and to get the old DCF number, you just have to add the "distribution to unitholder" number to the "excess (shortfall) of net cash provided by (used in) operating activities after distributions to unitholders and discretionary adjustments" number. For example, last year the company reported DCF of $679.3 million and it had a coverage ratio of 1.14x. It now will report that as excess cash after discretionary adjustments of $82.34 million, which, when added to the $ 596.9 million it paid in distributions, equals the old $679.3 million DCF number.
BMR Take: Right now, while it appears the SEC wants Linn to make some adjustments to the way it presents some non-GAAP data, the changes look more like semantics than anything else. None of the numbers have been changed, and it's easy to back out the new metrics to get the old DCF number. Importantly, it also looks like the distribution or future increases will not be impacted in any way by these changes.
The S-4 filing is a long document, and we'll look to scan analyst notes later to see if we may have missed anything. However, if the above adjustments are the only big changes that come out of this, then we'd view it as very positive. Our "Buy" rating and $36 price target remain unchanged.