Shorts Battle Over Linn

TheStreet.com

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NEW YORK (TheStreet) -- Linn Energy has become a news story without much news, courtesy of TheStreet founder Jim Cramer and the very aggressive short war being engaged by Barron's magazine and a research firm looking to make a name for itself.

So the battle over Linn is pitched, but let's take a look, not as an analyst but as a trader should -- trying less to find a winner in the numbers and rhetoric, but instead understanding the trading psyche that encircles this beleaguered name.

First, understand that Linn uses the Master Limited Partnership structure in a very unique way and some could argue it abuses this structure, both in the tax advantages it gains and the distributions it looks to pass along to its shareholders. I won't opine on whether turning an energy company into a registered MLP is a fair or unfair organizational trick, but I will say that it can make proper valuation of this name difficult for the retail investor -- there is no other energy company quite like Linn.

The retail shareholder is what the stock action has been all about. Linn is not an institutional name -- its holders are mostly all retail punters, easily frightened and sensitive to "bear raid" activity. With almost 5% short interest in the stock, there is a good financial reason for certain funds to very much want to see those shares go down.

Barron's has found fault with two aspects of Linn bookkeeping -- one, with the accounting of put options that Linn uses to augment the sale price of its natural gas production, using options that are financially priced as assets in the same way that it values outright physical production. Again, while this procedure can be seen as troubling because it is unique to Linn, I do not see the problem with it, as real assets and real production are directly accounted for with financial contracts. Second issue: Some researchers have had difficulty with the production value estimates of Linn's Granite Wash acreage. But using pricing for recent sales in the Granite Wash under "fire sale" conditions is equally unfair at valuing Linn assets. All of this valuation conflict for Linn is on the back drop of the Berry Petroleum acquisition, still to be approved by Berry shareholders.

Now here is where the trading psyche works to make the Linn shares a better "bear raid" opportunity. Linn uses subsidiary Linnco shares as capital for purchasing Berry, but negative news makes that acquisition less appetizing for Berry shareholders, making the acquisition less likely and forcing down Linn shares even further. Helping to dissuade Berry shareholders into approving the Linn deal is the smartest trading move for funds that are short Linn shares.

It's a negative trading circle for Linn right now, and the fact that the shorting research firm has found CNBC host Jim Cramer and his Action Alerts trust fund long Linn shares and supporting the company has made the bear activity that much more powerful. Besides three recent negative pieces from Barron's, the research firm conducted a conference call Tuesday, once again laying out their bear case. You'd think Barron's had given their minority view on Linn enough exposure already, but responding to Jim and his overwhelming media presence is another great opportunity to panic the retail shareholder and force prices again lower today -- in an up market.

Much of the outcome for Linn might depend on whether the "raid" is successful and the Berry deal closes. But the ultimate value of the shares and whether they're worth buying is now less about the financials and fundamentals, and more about the media war that's being engaged.

And that's the toughest variable for any trader to value.

At the time of publication, Dicker had no positions in securities mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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