tag:blogger.com,1999:blog-4815867514277794362.post8224527528041220047..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Linn Energy's Queen Gertrude MomentJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-4815867514277794362.post-57728817609166777002013-07-02T18:29:39.180+10:002013-07-02T18:29:39.180+10:00After reading Mr. Bary's response to Leon Coop...After reading Mr. Bary's response to Leon Cooperman's comments, it becomes clear to me that Mr. Bary doesn't understand the GAAP accounting at all. He believes that LINE has suffered Net Losses in 3 out of the last 4 years, 2012 being a loss of ($222 million) he believes. <br /><br />I've explained in detail in a previous post that the unrealized losses on derivatives used as hedges, which reduce GAAP Net Income, are mostly bogus. IT seems no one understands nor comprehends why these losses are mostly bogus, and doesn't give a damn. That is unfortunate because any investment based on such faulty understanding will result in you getting your ass handed to ya. Mr. Bary will be exposed as being "incompetent" for not understanding it. <br /><br />LINE doesn't have the earnings to pay for all its distributions, IMO, but they have a lot more than what Mr. Bary believes.<br /><br />See link below. An initial reported ($800,000) loss on a hedge turns into a $1,800,000 gain once the hedge is settled. Bottom line, to the degree the hedge is effective, the unrealized losses will not be realized, they are largely bogus. This applies in the same manner to LINE's hedges. Disregard at your own risk and injury. I'd suggest you forward this to Mr. Bary. At present he is totally incompetent and out to lunch in regards to LINE. It did not suffer losses in 3 out of the last 4 years, far from it. <br /><br />http://www.pageout.net/user/www/a/h/ahwang/Research/JAE%20FAS%20133%20Comparative%20Analysis.pdfAnonymoushttps://www.blogger.com/profile/08162567760630609769noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20771058115871125522013-02-22T07:40:42.539+11:002013-02-22T07:40:42.539+11:00You may be right, but I do not see why they cannot...You may be right, but I do not see why they cannot just continue this scheme into the indefinite future. As long as people are willing to lend them money and they are a genuine business this can go on for quite some time...<br /><br />Especially at 8.5% yield in today's IR environment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29185512924819228762013-02-21T11:36:48.848+11:002013-02-21T11:36:48.848+11:00Oops. I forgot that they raised equity capital at ...Oops. I forgot that they raised equity capital at above book value so that could keep the bv per share artificially high for a while. Re-doing the math from 2007/12 to 2011/12 equity up by 1.4B, dividends payout 1.4B, equity raise 1.8B so aggregate comprehensive income were about 1B (over 4 years), less than the dividends payout. Very questionable valuation at 2x book and leverage is high as well. Your short thesis could work out well. Are you hedging out your risk exposure to nat gas/oil price rocketing up? Granted their hedged production position is to your advantage but outer year reserves could get valued up if commodity price explodes.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64069685095168123612013-02-21T11:19:12.990+11:002013-02-21T11:19:12.990+11:00The blog made sense, however the scheme should be ...The blog made sense, however the scheme should be relatively easy to uncover if one look at the data over multiple years, since GAAP is alleged to be accurate here. From 2008 to 2012 book value per share has increased somewhat. Cash distribution was over $2.5 per share per year. So somehow the earnings must have covered the dividends.<br /><br />The reason that GAAP accounting tends to be not that useful for E&P is that it is backwards looking. So the above statement, even if true, won't tell me what the future looks like. That is why for E&P one needs to look at cash flow and reserve replacement. I guess this can get exploited by people who only look at the cash from operations (which is equally meaningless as earnings). And MLP investors who only look at dividends just beg to be scammed. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-3205803952351777662013-02-21T04:50:48.812+11:002013-02-21T04:50:48.812+11:00"The market cap is a little over $7 billion.&..."The market cap is a little over $7 billion."<br /><br />Are you sure about that? I have 35 million shares times 36.60 price totals 8.6 billion scamcap. You need to include the linn shares issued to LNCO.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-16600346001147438972013-02-21T01:07:42.824+11:002013-02-21T01:07:42.824+11:00Hey John - Long time, no speak, hope you're we...Hey John - Long time, no speak, hope you're well. Completely agree with the above and we've been tracking this for a while. It has long stricken me that this is the same scam we've seen 100x but w/ a new flavor - they are doing the classic CFFO to CFFI switch in reverse. The "hedges" are initiated with acquisitions, so they are really part of the purchase price. To then book GAINS on the settlement of these hedges is equivalent to reverse amortization of goodwill! It's bizarre. If you run the numbers on their deals including the hedge costs, they are barely earning their cost of capital, which makes sense given they are buying from knowledgeable sellers and have no real operating advantage. Any net proceeds from the "hedges" should be viewed much like prop trading gains were at GS by investors - don't count them when they win, holler when they lose. Anyhow, this one is getting fun. <br /><br />Best,<br />CreggAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-42903735632916012012013-02-20T23:18:10.662+11:002013-02-20T23:18:10.662+11:00you boys drinking to much beer bty jp morgam today...you boys drinking to much beer bty jp morgam today 2/20 overweight linn price target 43 better cover your "no mass pantolinoes"Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-61351662177203305942013-02-20T19:38:53.533+11:002013-02-20T19:38:53.533+11:00To the Hilt said: "The question here, JH, is ...To the Hilt said: "The question here, JH, is what reverses the flow of money? To short the MLP Yield Monkey Army, you need a view on more than sketchy accounting or self dealing. Uncle Cletus dont care until he thinks he might not get his next check. "<br /><br />True, Uncle Cletus don't care until he thinks he might not get his next check, cause Uncle Cletus don't understand where the cash is coming from and doesn't understand where the Earnings come from and what actually increases the company's Net Assets/Net Worth. Uncle Cletus just says, "Show Me the Money!!" <br /><br />The reality is that LINE has to have sufficient earnings or profit to pay ALL Distributions, but it doesn't. Far from it. <br /><br />The only thing that will increase LINE's Net Worth/Net Assets is "Earnings" or "Net Income". These two terms are one and the same. Paying distributions from borrowing increases liabilities and decreases the company's Net Worth or Equity. Paying distributions from the issuance of Equity is just an exchange of equity for equity, it doesn't profit you a cent. <br /><br />Line has to keep acquiring, borrowing, issuing equity to maintain distributions and to increase distributions because Net Income each year is not sufficient to cover them. <br /><br />AT some point, it's my guess that debt will become so massive that banks will stop lending. That's when the bubble will burst, IMO. Uncle Cletus ain't gonna be none too happy about that. Anonymoushttps://www.blogger.com/profile/08162567760630609769noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55358882261472030832013-02-20T17:57:45.458+11:002013-02-20T17:57:45.458+11:00Accrual accounting, and GAAP, are the ONLY recogni...Accrual accounting, and GAAP, are the ONLY recognized and sanctioned forms of accounting for public companies under the jurisdiction of the SEC, for many reasons. The Financial Accounting Standards Board (FASB) creates GAAP and it is supported by the AICPA and the SEC. Cash basis or modified cash basis accounting is rejected by FASB, the AICPA, and the SEC for reporting and financial statement purposes due to their inherent weaknesses in fairly reflecting the financial position and operating results for any period of time. These weaknesses also apply to EBITDA. It is not sanctioned or recognized by FASB, the AICPA, or the SEC. <br /><br />Am I clear enough in regards to EBITDA? Anonymoushttps://www.blogger.com/profile/08162567760630609769noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-577163993428131042013-02-20T17:44:40.725+11:002013-02-20T17:44:40.725+11:00anonymous said: "One man's gaap is anothe...anonymous said: "One man's gaap is another man's footnote."<br /><br />EBITDA is a modified cash basis form of accounting. It includes components of both cash basis accounting (not counting interest, taxes or depreciation/amortization, or one or more of these) and accrual accounting (counting receivables/payables). <br /><br />Because it includes components of cash basis accounting, where it fails to include some actual accrued costs of a company, it is not reliable as a determinate of the actual earnings or Net Income/Loss of any business. <br /><br />Anonymoushttps://www.blogger.com/profile/08162567760630609769noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-81384247147521470322013-02-20T17:32:14.585+11:002013-02-20T17:32:14.585+11:00I'm sure all of this gibber-jabber about how w...I'm sure all of this gibber-jabber about how what derivatives should be added to what line in what statement are entertaining to a certain class of CFA level iii candidates, but shall we take a step back? <br /><br />If CFO less CFI is less than dist cash, then you have a red flag. Of course this is common given the insatiable appetite for growing Gordon's model and easy money to fertilize the weeds, but right here you have a company or some odd partnership entity that needs the aid of trusty old CFF to plug the hole. <br /><br />Fret not thyself from which line comes the plug. Follow ons, converts, triple revolvers with a twist, it is all the same. Borrow to pay the dividend. Ponzi. (As an aside, my personal favorite is the DRIP. Using the dividend to pay the dividend...now that's the ultimate...that takes a mgmt team with some style to pull that wool) Just be sure to put something about IRR in your press release and maybe some thing about these aren't the droids you're looking for. Everything's fine. <br /><br />The question here, JH, is what reverses the flow of money? To short the MLP Yield Monkey Army, you need a view on more than sketchy accounting or self dealing. Uncle Cletus dont care until he thinks he might not get his next check. <br /><br />In china ADRs (have we all given up on that trade?), it was fear or distrust or whatever you want to call it that spooked folks away at the slightest hint of accounting whose water might be...lets say murky. But most of those companies weren't sending a check every month or so to income starved Cletus, Luke, Bo, Jesse, or John p coltraine. <br /><br />To The Hiltnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-35866269795733882942013-02-20T16:47:58.580+11:002013-02-20T16:47:58.580+11:00What sayest thou in regards to the ev / ebitdasgac...What sayest thou in regards to the ev / ebitdasgacogs method of financial valuation?<br /><br />One man's gaap is another man's footnote.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76879095551527506622013-02-20T16:41:53.813+11:002013-02-20T16:41:53.813+11:00John,
I agree that LINE doesn't have suffici...John, <br /><br />I agree that LINE doesn't have sufficient "earnings" or Net Income to have paid $2.4 Billion in distributions. However, it isn't as bad as the GAAP numbers, in my opinion. <br /><br />GAAP hedge accounting requires unrealized gains/losses on derivatives to be included in Net Income when a company like LINE doesn't "designate" its hedges as a Fair Value hedge, Cash Flow hedge, or Net Investment hedge. So, if LINE suffers a loss in fair value on a hedge before it is settled, it mus be reported as a GAAP unrealized loss on the Income Statement and reduces GAAP Net Income or increases a GAAP Net Loss. <br /><br />So, let's say the current market price of oil is $96/barrel, and you want to hedge this price for 3 years, so you go out and buy puts so you can sell the oil for at least $96/barrel three years from now. Now, let's say that in 6 months that the price of oil has climbed to $100/barrel. Your puts have lost fair value, even though they haven't been settled yet. That unrealized loss in fair value has to be reported on the Income statement. However, your oil reserves, the hedged item, have risen in fair value, from $96/barrel, to $100/barrel. But this increase in fair value is not reported on the Income Statement to offset the loss of fair value of the hedge. Your reserves remain on the books at historical cost. <br /><br />So, only one side of the impact of rising oil prices is reflected in GAAP numbers. This, IMO, distorts the GAAP numbers and makes them worthless without adjusting for the unrealized losses/gains on the derivatives. You've got to take them out of the GAAP numbers to get valid and credible Net Income or Loss numbers. <br /><br />Adjusting for them puts LINE in the black about every year. IT's still not enough to pay for all the distributions, but it's not as bad as the GAAP numbers portray it. <br /><br />See the link below. Under "Hedge Accounting", it states: "The accounting for derivative instruments at fair value creates a common issue for organizations that<br />hedge risks using such instruments. Specifically, such organizations may face an accounting mismatch<br />between the derivative instrument which is measured at fair value, and the underlying exposure being<br />hedged, as typically underlying exposures are recognized assets or lia bilities that are accounted for<br />on a cost or an amortized cost basis, or future transactions that have yet to be recognized. This<br />accounting mismatch results in volatility in the financial statements as there is no offset to the change<br />in the fair value of the deriva tive instrument."<br /><br />http://www.rfpconnect.com/Content/userfiles/hedge-accounting-kpmg-whitepaper1%281%29_612.pdf<br /><br />The "mismatch" this article speaks of is what I am talking about. A hedge, not declared a hedge for accounting purposes must be reported on the Income Statement at fair value, before settlement. But the hedged item remains at historical cost less depletion/depreciation/amortization. This creates a mismatch and makes the GAAP number distorted and does not reflect the economic reality. <br /><br />Bryce_in_TexasAnonymoushttps://www.blogger.com/profile/08162567760630609769noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-114264511400240412013-02-20T16:23:48.423+11:002013-02-20T16:23:48.423+11:00Anonymous wrote:
"Keep in mind this is an E&a...Anonymous wrote:<br />"Keep in mind this is an E&P company with an MLP wrapper"<br /><br />Note that LNCO is an E&P company with an MLP wrapper with an E&P wrapper around the MLP wrapper.<br /><br />LNCO is the biggest scam of all.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-60986018016343012262013-02-20T15:55:44.309+11:002013-02-20T15:55:44.309+11:00I am an accountant. As John says, the GAAP account...I am an accountant. As John says, the GAAP accounting is right, but Linn draws attention to a nonGAAP number in deciding dividends and asserting performance. This is somewhat similar to what companies in Aus did many years ago, when they focused on a number called 'Profit before Abormals'. Only issue was that there was no such concept under the then Australian accounting standards. A colleague of mine drew ASIC's attention to this, and the clamped down hard.<br /><br />If you focus on nonGAAP, you get what you deserve. When we teach it, we refer to EBITDA as 'profit without the bad bits' :)Australian Institute of Polish Affairshttps://www.blogger.com/profile/08485226948104988601noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-28569852157325521262013-02-20T15:19:48.203+11:002013-02-20T15:19:48.203+11:00The do expense the cost of the put through gaap pl...The do expense the cost of the put through gaap pl. first the capitalize the cost and then run through pl as unrealized losses in derivatives. Then to get to adj ebitda they add it back. Essentially making the put free from an ebitda perspective.<br /><br />So they book the gain when there is one. And when they buy an in the money put they can 'manufacture ' a gain since th intrinsic value is treated as a gain. And then they say....the puts we buy have no cash cost...<br /><br />It may not be fraud, but it is misleading and overstates the steady state distributable cash flow. <br /><br />Keep in mind this is an E&P company with an MLP wrapper. They have to try to create the illusion of stable cash flows to keep the high multiple which makes the whole model work. Without a high multiple they can't buy more assets which is the only hope they have to grow distributions...<br /><br />Lastly....don't think that the analysts will ask tough questions. The banks earn too many fees from the m&a, equity offerings and debt raises these guys do.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55890830550497071452013-02-20T14:03:22.143+11:002013-02-20T14:03:22.143+11:00These arguments are going to fall on deaf ears for...These arguments are going to fall on deaf ears for anyone who actually invests in the MLP space, because nearly all MLPs hedge to some degree and the closer you get to the E&P end of the spectrum, the more the companies hedge.<br /><br />There's really no way to run an E&P business without substantial hedging. NG and Oil prices are simply too volatile. Buying puts and selling swaps (effectively equivalent to writing a call) are the two primary mechanisms by which these companies hedge.<br /><br />This same issue came up during the crash in 2008/2009 as well, with many investors not familiar with the MLP space coming to believe that the E&P's were completely doomed due to not understanding their hedging or the multiple ways they had to raise cash. Combined with forced selling by hedge funds and margin calls, this caused prices to blow down to insanely low valuations. But it didn't last. Sanity returned to the markets and investors suddenly realized that the MLPs were not about to go bust, or anywhere near going bust.<br /><br />So in many respects you guys are crying wolf after it's already been cried. It won't work the second time.<br /><br />That said, anyone with experience in the MLP space, particularly the energy MLP space, knows what the risk is. The risk that prices might remain depressed far longer than the companies hedge books can handle and still make a profit. But this sort of outcome is not really a ponzi scheme... the companies will cut their distribution if/when the circumstances require (as they have in the past). It is this risk that investors must understand about the space.<br /><br />Also, one final note: All energy MLPs raise cash through a combination of their revolver, capital raises, and debt. Not just LINE. All of them. And, generally speaking, it's pretty obvious when these companies get into trouble simply by looking at DCF coverage and debt payment schedules (as we've seen with CHK). LINE isn't anywhere near being in trouble, yet.<br /><br />-MattAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-65818994433936270742013-02-20T10:29:47.406+11:002013-02-20T10:29:47.406+11:00“I am just going to call BS on this,” Bronte’s Joh...“I am just going to call BS on this,” Bronte’s John Hempton proclaimed. “The company is claiming that it purchased substantial numbers of below market hedges. I want to point out the average price of gas sold after hedging in 2009, 2010 and 2011 was $8.57, $8.22 and $8.20 respectively. It is an awful long time since the natural gas prices — even forward natural gas prices — let alone say five year strip natural gas prices were that high. There is simply no way that these prices were obtained except by purchasing substantially in-the-money positions with large amounts of cash.”<br /><br /><br />John,<br /><br />You could buy 1 and 2 year forwards at these levels and above in 2008 (and no doubt 4 and year 5 forwards as well)<br /><br />isn't this what they would have done?<br /><br />not that this detracts from your central concern - which is asymetric accounting treatment plumping up apparent EBITDA. <br /><br />here is a question though: Don't they have to write the cost of the put off once it is exercised ? so the unamortised put premium would be taken through P&L at the time the revenue is recorded on exercise of the put.<br /><br />If that is the case, where is the harm?<br />if that is not the case, where are the accountants ?!!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-42592110863776351582013-02-20T08:49:38.436+11:002013-02-20T08:49:38.436+11:00Here is one lie that you guys made that is easily ...Here is one lie that you guys made that is easily refuted by just five minutes of actual research. I guess you forgot when nat gas prices were over $11 a few years ago.<br /><br />"I am just going to call BS on this. The company is claiming that it purchased substantial numbers of below market hedges. I want to point out the average price of gas sold after hedging in 2009, 2010 and 2011 was $8.57, $8.22 and $8.20 respectively. It is an awful long time since the natural gas prices -- even forward natural gas prices -- let alone say five year strip natural gas prices were that high. There is simply no way that these prices were obtained except by purchasing substantially in-the-money positions with large amounts of cash."<br /><br />Remember that Linn hedges 3-5 years out into the future. This is from a 2008 cc.<br /><br />"Q): Hey guys, I actually have two questions for you. The first one is on the hedging, I think it’s great that you rolled up the hedges on the oil production. Just curious why you didn’t look to do anything in gas, with the big spike we had in gas recently as well?<br /><br />"A) Michael Linn: Well, we looked at both of those, Dan, but quite frankly, gas had moved lower by the time we were executing these trades. So, if gas moves up again higher, I think we would look at that seriously because I think we picked some significant value. <b>But with gas moving down towards the $9.00 range with our hedges at $8.50 there’s really not much to be gained there.</b>"Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49684165209127152212013-02-20T07:36:23.728+11:002013-02-20T07:36:23.728+11:00Reminds me of Polly Peck in a way.
Make vast inco...Reminds me of Polly Peck in a way.<br /><br />Make vast income through the P&L through lending money at 50% into another currency. Then write the capital losses on the depreciation of the currency off against reserves.<br /><br />Eventually you run out of money.<br /><br />Yes, obviously, the method being employed is different. But the basic accusation is the same. Tim Worstallhttps://www.blogger.com/profile/13161727860817121071noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-41370001608179100392013-02-20T05:42:46.467+11:002013-02-20T05:42:46.467+11:00Once again a truly amazing analysis. I suspect th...Once again a truly amazing analysis. I suspect that lots of E&P companies are playing games, they got away with murder in the mid 2000 when oil prices started rising (they were replacing light and sweet crude with heavy and sour crude), they made good because all ship are raised by the tide. <br /><br />It remains that using these kinds of games has become rather common. In Canada, there is nothing wrong with raising cash to pay a dividend (look at Air Canada), several companies have done so (especially those wanting to reduce available cash for labour negotiations).<br /><br />The details have always been in the notes, what is remarkable is that under GAAP rules they are more often then not unprofitable, while "everybody" seems to be mesmerized by the EBITDA figures... does not speak volume of our North American banks does it!Frozen in the Northhttps://www.blogger.com/profile/04901959687094626879noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30366447341335147352013-02-20T04:13:47.391+11:002013-02-20T04:13:47.391+11:00
You forgot to mention that LINE owns non-operated...<br />You forgot to mention that LINE owns non-operated acreage in the North Dakota Bakken! The sure sign of a scam. They could even buy NOG at a 1-1 ratio and have it be accretive to distributable cash flow!Anonymousnoreply@blogger.com