Thursday, February 21, 2013

Linn Energy per flowing barrel

A fairly standard oil-and-gas valuation metric is the price per flowing barrel for oil and gas.

Oil at $100,000 per daily flowing barrel is considered high end - but some transactions happen at higher prices when there are further development opportunities in the field and the oil is light, sweet crude.

Flowing gas (per BTU) is typically worth about half flowing oil. [Use a conversion that 6 Mcf of gas is equivalent to about 1 barrel of oil]. So lets call this $50,000 per flowing barrel equivalent.

Natural gas liquids trade at about half the price of oil - and so a flowing barrel should be worth about half a flowing barrel of oil. Also lets call this $50,000 per flowing barrel equivalent.

These are fairly standard metrics and any oil and gas analyst should be able to confirm that I am not rigging the numbers here.

Linn Energy per flowing barrel

Here - from the last form 10-Q is the average daily production of Linn Energy for the last quarter by different types of hydrocarbon:

Three Months Ended
September 30,
Average daily production:
Natural gas (MMcf/d)


Oil (MBbls/d)


NGL (MBbls/d)


Total (MMcfe/d)



The increase is not driven by field development but by buying almost $2.5 billion in new assets.

Using the metrics above:
  • The gas production is worth 409,000*$50,000/6 = $3.41 billion. 
  • The oil production is worth 30,800*$100,000 = 3.08 billion and
  • The NGL production is worth 31,400*$50,000= 1.59 billion
The total valuation of the hydrocarbons is thus 8.08 billion as per the flows in the last 10-Q.

The last 10-Q also showed LINN as having debt of $6.84 billion in debt. So the equity would be worth 1.24 billion.

There were 199 million units outstanding as per the last 10Q. This gives an equity valuation of $6.22 per unit - a fair bit lower than the current price of $36.65 per unit. Longs can expect an 80 percent loss on their units using these valuations.

My view is that Linn Energy's gas and oil fields are pretty clapped out - and worth considerably less than the above metrics. The average well flows about 6 barrels per day! [My personal view: the debt will be impaired.]

However even at a full price this MLP is worth under $7 per unit.

To be fair though - this company has purchased a lot of in-the-money options and its option position is valuable. The value of those is about $900 million - which is almost $4 more per unit.

To get anything like the price targets of the bullish analysts are putting on it you need to think these clapped out assets are worth $200,000 per flowing barrel.

I know, I know you object: MLPs are not valued on their underlying assets. They are valued on their yield.

And they are. Until the yield stops.


Wednesday, February 20, 2013

Linn Energy: A bizarre definition of distributable cash hides really clapped out assets

The last post explained just how bizarre the definition of EBITDA/distributable cash is at Linn Energy. This bizarre definition of EBITDA in my opinion allows a zany and unsustainable level of distributions to be paid and hence attracts investors.

This stock is sold on the yield.

I think you should buy shares on the underlying assets and not a running yield.

So it is worth looking at what the underlying assets are.

Here from the last 10-K is a disclosure on the number of productive wells owned:

Productive Wells
The following sets forth information relating to the productive wells in which the Company owned a working interest as of December 31, 2011.  Productive wells consist of producing wells and wells capable of production, including wells awaiting pipeline or other connections to commence deliveries.  “Gross” wells refers to the total number of producing wells in which the Company has an interest, and “net” wells refers to the sum of its fractional working interests owned in gross wells.  The number of wells below does not include approximately 2,500 productive wells in which the Company owns a royalty interest only.
Natural Gas Wells
Oil Wells
Total Wells
Operated (1)
Nonoperated (2)
The Company had 12 operated wells with multiple completions at December 31, 2011.
The Company had no nonoperated wells with multiple completions at December 31, 2011.

The previous year the total was not dramatically different - this from the 10-K for the year ended 2010:

Productive Wells
The following table sets forth information relating to the productive wells in which the Company owned a working interest as of December 31, 2010.  Productive wells consist of producing wells and wells capable of production, including wells awaiting pipeline or other connections to commence deliveries.  “Gross” wells refers to the total number of producing wells in which the Company has an interest, and “net” wells refers to the sum of its fractional working interests owned in gross wells.  The number of wells below does not include approximately 2,700 productive wells in which the Company owns a royalty interest only.
Natural Gas Wells
Oil Wells
Total Wells
Operated (1)
Nonoperated (2)
Ten operated wells had multiple completions at December 31, 2010.
Three nonoperated wells had multiple completions at December 31, 2010.

They would have averaged about 3,170 net productive gas wells and 3,520 net productive oil wells. The average total productive wells would have averaged about 6,700.

And here from the form 10-K is the average daily production.

The following sets forth information regarding average daily production, average prices and average costs for each of the periods indicated:
Year Ended December 31,
Average daily production:
Natural gas (MMcf/d)
Oil (MBbls/d)
NGL (MBbls/d)
Total (MMcfe/d)

They produced 175,000 Mcf/d of natural gas and 21,500 barrels of oil per day with another 10,800 barrels of natural gas liquids.

The total gas equivalent is 369,000 Mcf/d of natural gas.

Lets do some division. The oil wells produce 21,500 barrels of oil per day from an average of 3,520 wells. This is an average of 6 barrels per day.

There are going to be an awful lot of wells that produce less than two barrels per day.

The gas wells produce 175,000 Mcf/d of natural gas from 3,170 wells. This works out at 55 Mcf/d in gas. At a $3 gas price these wells are producing - get this - $165 in natural gas per day. Presumably these wells are also declining...

Fortunately they also produce 10,800 barrels of natural gas liquids per day. That is 3.4 barrels of liquids (at about $45 a barrel as an estimate).

I have a few questions of management:

Question 1

How many of the much-vaunted wells produce less than $100 gross revenue per day? Oh, that $100 needs to be before hedging!

Question 2

How many wells were shut down or went out of production in each of the last five years because the flow rates were so low the wells became non-economic?

Question 3

What is the right level of maintenance capital expenditure for wells with flow rates this low? How does this level of maintenance capital expenditure differ from the maintenance capital expenditure used for calculating distributable amounts?

High valuations for clapped-out assets

This company sports a premium valuation for very old and very run-down-low-production wells.

I believe this premium valuation is because people see the (high and attractive) dividends not the (clapped-out) underlying assets.

The fact that the dividends are - at least in part produced by financial engineering not cash flow (as per the last post) is besides the point. This company buys and manages clapped out oil and gas properties and maintains a perception of asset backing. After all the MLP is issuing large numbers of units and they are selling both dividends and the perception of asset backing. Telling a good story about run-down assets is necessary.

The long term future of Linn Energy: Who would normally own the wells?

These wells are valuable. A well flowing 3 barrels per day still generates $70-100 thousand a year of gross revenue. There is only a small fraction of that left after production taxes and maintenance. Someone has to fuel and maintain the nodding-donkey oil pump after all. And someone has to drive the truck around to collect the oil.

This is gritty work. Apart from anything these fields are laden with environmental problems - because typically the pump is pulling up a barrel of oil and fifty barrels of salt water per day. The salt water needs to be disposed of. And the oil collected and spills dealt with.

So you are under no illusions this what a typical unit producing one barrel per day (and 150 barrels of salt water) looks like check out this video from You Tube.

What you own if you own Linn Energy is simple. It is thousands of these things.

But lets get back to the natural owner of this well. I know the guy. Sun burnt but would be far more sun burnt without the hat. A pick-up truck. Dog and a shot-gun in the back. Political views well to the right of mine.

You have to admire this guy - he is a self-reliant individual who works without much corporate overhead. Has nobody to blame when the electric motor burns out than himself. And he works hard. Real hard.*

This assets owned by Linn Energy are not normally the sort of asset owned by a 14 billion dollar enterprise valuation listed entity. They are owned by the red-necked, gun-toting self-reliant individual who works hard and does not mind getting his hands dirty.

When this MLP runs out of cash to distribute it is likely to be dismantled and the assets will be sold to those those fine people with their politics, dogs and shotguns. Assets like these tend to find their natural owners.

In liquidation I seriously doubt if there will be anything like enough to make whole the $7 billion owned to the banks and other lenders. If you are Linn Energy debt-holder beware.

Something substantial for the residual equity holders? Surely you must be joking?


*Please understand I am not mocking the natural owner here. If my (non-existent) daughter married him I would be pleased for her even if social conversation at Christmas dinner was awkward. I have far more respect for that-type than I have for many financial or CEO types...

Linn Energy's Queen Gertrude Moment

Linn Energy (Nasdaq:LINE) is the biggest oil-and-gas production Master Limited Partnership (MLP) in the US. The market cap is a little over $7 billion and there is a little over $7 billion in debt.

Like many MLPs it raises a lot of money and it pays big, fat and increasing dividends.

I have a number of listed companies including Linn Energy on "Ponzi watch" because they could potentially be Ponzis attracting capital with large and increasing dividends in an ultimately unsustainable spiral.

There are two things that make Linn Energy stand out. One is the voraciousness with which it raises money and the innovative ways it chooses to do so. In 2009 it raised $292 million. In 2010 it raised $844 million in equity and borrowed over $1.1 billion net. In 2011 it raised a further $679 million and borrowed another $1.2 billion. In 2012 until September it raised another $761 million and borrowed over $2.8 billion net. (Source cash flow statements from the last 10-K and 10-Q.) The company is the most innovative money-raiser in the MLP space having made a parallel structure (Linn Co - NASDAQ:LNCO) to appeal to institutional investors.

The second thing which makes Linn Energy stand out is their strange hedging policy. Linn Energy buys in-the-money puts. It also appears to have entered in-the-money-swaps on gas it intends to sell.

It sells the gas and collects money on its puts and its swaps. The proceeds when the puts and swaps are exercised is considered as distributable income. This is bizarre - so bizarre that I could scarcely believe it was real.

It was as if I owned a Microsoft Share with a market price of $28. And for $12.90 I purchased a $40 January 2014 put for it. [This contract is real - it can be purchased.].

Then come January I exercised the put, sold my Microsoft Share for $40 and declared a big capital gain. I told my clients all about the capital gain and told them they could spend it. I even gave it to them  in distributions. And I told them to ignore the $12.90 I paid for the put which I had amortized away. After all the put premium disappears in depreciation and amortization - and amortization is a non-cash expenses.

If a mutual fund did this I would call it fraud. But just as the water goes down the bath hole differently in the Southern Hemisphere what is fraud in a mutual fund is acceptable in a very large MLP. Much to my disbelief Linn Energy seem to do precisely this.


Recently some anonymous short seller argued that Linn Energy's accounts were fake because they were doing precisely what I said they were doing above. Barrons recently made similar points.

Whatever - the short seller said (according to the MLP) that the MLP purchased "deep in the money" puts. This led to an amazing 8-K released by Linn Energy - an 8-K leaves me thinking of almost nothing except Queen Gertrude in Hamlet saying "methinks the lady doth protest too much".

This blog post repeats the whole press release with annotations. The original is in italics.

LINN’s Hedging Strategy and Response To Inaccurate Statements
Made By An Anonymous Short Seller
“Since our IPO, hedging our oil and natural gas production has always been an important strategy for the company and our investors. Our hedge strategy has served LINN and our investors well through a variety of commodity price cycles,” said Mark E. Ellis, Chairman, President and Chief Executive Officer. “Hedging will continue to be an integral part of LINN’s strategy.”
Below is an overview of the company’s hedging strategy and the company’s comments related to inaccurate statements made by an anonymous short seller.
Hedging Rationale

Reduce commodity price risk

Lock in acquisition margins

Lock in margins on organic drilling (capital investment)

Provide stability and growth in distributions

Preserve ability to make acquisitions during down markets
Hedging Strategy

Hedge up to 100% of expected production for 4-6 years

Continually maintain a 4-6 year hedge book

Use approximately 70% swaps (fixed price contracts) and 30% puts (floor contracts with unlimited upside)

Typically budget up to 10% of the cost of an acquisition for put expenditures
This last line is an admission that they buy puts and capitalize them. They also own gas swaps (ie forwards) which are a long way out of the money. Do they also budget cost for buying those? I would like to know.

Fact #1 – LINN is confident in the validity and accuracy of its audited financial statements.
Well they would say that wouldn't they? However there is no allegation I am aware of that the P&L or the balance sheet is incorrectly stated. The allegation is that EBITDA (which is not a GAAP concept) is overstated and they are paying unsustainable distributions.

Indeed the idea that they are paying unsustainable dividends is supported by their audited accounting statements. Linn Energy made an audited GAAP loss of $298 million during 2009. It paid $303 million in distributions. It made an audited GAAP loss of $114 million in 2010 and paid $366 million in distributions. In 2011 it made a (rare) profit of  $438 million and paid $466 million in distributions. (Source: the last 10-K).

The last 10-Q reveals the situation has worsened: Linn Energy made a loss of 199 million in nine months - but it made 430 million loss in the last quarter. And it paid distributions of 426 million.

The pattern is increasing losses and increasing distributions - something that would be a standard feature in a Ponzi.

As a short seller I am relatively confident in the accuracy of Linn Energy's audited accounts. Far more confident than I am in their definition of distributable EBITDA.

Fact #2 – LINN generates sufficient cash flow to cover its distributions.

Since the company’s IPO in 2006, LINN has paid its distribution for 27 straight quarters. These distributions were paid in CASH.

Amortization of puts is a non-cash expense and should not be deducted from EBITDA (hence the definition of EBITDA; earnings before interest, taxes, depreciation and AMORTIZATION).

LINN considers the cost of puts as a “capital” investment and views it as an additional cost of an acquisition (hence the target to spend up to 10% of the cost of an acquisition on puts). No one disputes that “depreciation” of oil and natural gas assets should be excluded from EBITDA or distributable cash flow because it is a “capital” expense, and the company views puts the same way.

When LINN purchases puts, the company pays 100% of the cost in upfront cash and capitalizes them as an asset on the balance sheet.

The cost of LINN’s puts is deducted from Net Income over time. Net Income is not a cash metric.

What does flow through to Distributable Cash Flow per Unit is the cost of debt and equity securities (interest and distributions) that were needed to purchase both the oil and natural gas assets and the puts. This is a CASH expense.

Anonymous short sellers are improperly mixing the definitions of cash flow and non-cash flow metrics (Net Income vs. Cash Flow).
This is a straight admission of the short-case against Linn Energy. Linn Energy buy puts. They pay money for these. They do not consider amortization of those puts an expense that should be deducted from their "distributable amount". They admit it should be deducted from the GAAP income.

This is an absolute analogue of me buying $40 puts on Microsoft and considering the gain when I deliver my Microsoft shares to be distributable. [Of course my GAAP accounts will tell the truth. Linn Energy's GAAP accounts also tell something approximating the truth. The truth is that Linn Energy is a loss making enterprise.]

Fact #3 – LINN does not always buy “in the money” puts.

Most of the company’s hedge positions consist of swaps (approximately 70%), which are entered into on “market” terms.

Now here is where the company completely loses me. All this legerdemain is alright because most of it is done through swaps on "market" terms. The give-away is that the word "market" is in inverted commas. You see this is a definition of "market" that I am not normally familiar with...

In particular the company swaps seem to be at the same price or higher than the company puts. And the puts are purchased "in the money". Moreover they invest money in their swaps so the swaps are purchased in the money.

You can see this in the last 10-K. In 2012 the price of their gas swaps is $5.85 (a fair way in the money). The price of their puts is $5.83. There is not much difference. There is not much difference in the out years except that for 2014 the price of their swaps is $5.69 and the price of their puts is only $5. In some years it seems the company "invests" just as much in their swaps as in their puts.

So they use swaps to fudge their distributable amount too.

The remaining balance of the hedge position consists of puts, the majority of which were purchased BELOW the market.

oOut of 40+ hedging transactions over the last 10 years, only 7 were purchased “in the money.”

Some of the confusion arises due to the fact that certain investors do not know the difference between the prompt price (today’s price) and the 4, 5 or 6 year average market price.

oFor example, if the spot price for natural gas is $2.00 per Mcf but the 5 year average is $4.50 and LINN purchases a $5.00 put, that could hardly be considered “deeply in the money” when compared to the 5 year average market price.

oWhen making decisions regarding spending money for puts, LINN focuses on achieving the best value for its money.

Additional confusion arises when some investors look at the price levels for the company’s hedge positions. This is largely due to the fact that most of LINN’s hedges were executed when prices were higher.

oObviously this is the reason the company hedged in the first place. LINN wanted to insulate the company from just such an event.

LINN has never and will never purchase deeply in the money puts to manipulate its cash flow stream.

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.

The last sentence - that LINN has never and will never purchase deeply in the money puts to manipulate its cash flow stream is a real Queen Gertrude moment as will be discussed below.

Fact #4 – LINN does not restructure its hedge book to manipulate earnings.

On rare occasions, LINN has restructured its hedge book.

oOne example was in 2008, when oil soared to $150 and LINN’s put strikes were approximately $70. At the time, that hardly felt like adequate protection. LINN paid a nominal sum to raise the strike prices for 2009 and 2010 to $120 and $110, respectively. First, both transactions were well BELOW the market, and second, oil later that year declined to a low of roughly $35.

Two other examples came in July 2009 and September 2011:

oBoth instances involved a precipitous decline in prices in the “long” part of LINN’s book (i.e. in years 4-6).

oLINN realized gains of approximately $75 million by unwinding these positions. The company’s intent is always to leave the value in the hedge book instead of taking the cash. Therefore the company used the proceeds to raise hedge prices in near term years by a nominal amount.

oShortly thereafter, LINN rehedged the outer years again.

oBottom line is this is extremely rare and the magnitude of the trades is immaterial.

I agree LINN does not restructure its hedge book to manipulate earnings. The hedges are accounted for properly on a GAAP basis. What this does do is change its measure of EBITDA. In every instance they have reduced the price received in out years (reducing the EBITDA in out years) and increased the price received (and hence their measure of EBITDA) in the near-years. What they are doing is manipluating their dodgy definition of EBITDA and hence distributable cash flow.

They do this to continue to fake-up their distributable income and hence allow them to pretend to have a sustainable dividend.

They say the trades are immaterial - however the last 10-K contains this amazing section:

In September 2011, the Company canceled its oil and natural gas swaps for the year 2016 and used the realized gains of approximately $27 million to increase prices on its existing oil and natural gas swaps for the year 2012.  In September 2011, the Company also paid premiums of approximately $33 million to increase prices on its existing oil puts for the years 2012 and 2013.  In addition, during the fourth quarter of 2011, the Company paid premiums of approximately $52 million for put options and approximately $22 million to increase prices on its existing oil puts for 2012 and 2013.
Lets count that out. The company used 27 million of gains (taken out of 2016 hedges) just to increased their estimated distributable income in 2012. But that was not enough. So they paid $33 million to increase the price of their oil puts for 2012 and and 2013. They also paid 52 million for more put options and 22 million to increase prices on oil puts for 2012 and 2013. Funnily enough all this legerdermain is additional to the ones disclosed above in the press release.

This is beginning to look (a) material and (b) like a pattern.

The company says that it has never and will never purchase deeply in the money puts to manipulate its cash flow stream. That was the Queen Gertrude moment - after all they have a pattern of paying to make options and swaps more in the money to manipulate their cash flow stream.

Fact #5 – During 2012 LINN purchased $583 million of puts for the following reasons:

During 2012, LINN completed approximately $3 billion of acquisitions. Consistent with its hedging strategy to reduce commodity price volatility and lock in margins associated with the acquisitions, LINN purchased approximately $320 million of puts (again roughly 10%).

The remainder of the $583 million spent during 2012 was used to add puts for 2013 through 2017 for volumes that were not yet hedged.

As a reminder, this $583 million cost has a true finance cost (interest and distributions). The puts were purchased with cash. The potential benefit may not be realized for years to come. However, the cost is reflected now in LINN’s distributable cash flow per unit.

I have read this several times. All it means (I think) is that they paid out $583 million in cash which they will receive back when they sell gas and oil in the out years. That cash (which was borrowed as far as I can tell) will wind up being counted as distributable cash flow and be distributed. In a round about way then the company is borrowing to pay distributions.

Fact #6 – LINN’s publicly stated Adjusted EBITDA is the same that the company provides to its lenders.

Bluntly: Linn Energy uses the same misleading definition of EBITDA with the people it borrows from as it does with the unit holders. Does this make the lenders nervous? Should it make the lenders nervous?

Fact #7 – LINN’s taxable income is low relative to its cash flow.

The company’s taxable income due to non-cash deductions is relatively low compared to cash flow. So is every other oil and gas company.

LINN does not pay distributions with net income; the company pays them with cash flow and clearly has sufficient cash flow to do so.

I agree Linn's taxable income is very low relative to its cash flow. This company makes GAAP losses. It also - as far as I can tell makes tax losses - there is no taxable income.

Linn Energy however has raised its distributable cash flow with its strategy of buying in-the-money hedges. They just don't think that is faking EBITDA. I report: you decide.

Fact #8 – LINN only cancels out of the money hedge positions to comply with lender covenants.

On two occasions the company cancelled hedge positions, which happened to be out of the money at the time, to comply with its bank covenants when selling assets.

LINN also cancelled interest rate hedges when issuing long-term fixed rate bonds, again to comply with its covenants.

This is maybe the most extraordinary admission I have ever seen from a richly valued company. This company has has rejigged its hedging to comply with its covenants. Which covenants? Is it necessary to use this convoluted and unusual definition of EBITDA to comply with covenants? How do lenders feel about this? Do lenders even know they are being fed an unusual definition of EBITDA?

Fact #9 – LINN does not issue debt and equity securities to pay its distribution.

Since the company’s inception, LINN has issued approximately $12 billion of debt and equity securities:

~$10 billion to finance acquisitions

~$1 billion to finance puts (roughly 10% of the cost of the acquisitions)

~$1 billion primarily to repay higher cost debt

Since its IPO, LINN has paid $2.4 billion in distributions. The only way that would be possible is by earning a sufficient amount of cash to pay the distribution, which LINN clearly did.

I agree the company does not raise money to pay distributions. Linn borrows money to buy things including put options and other derivatives. The money paid for these derivatives turns to cash as the company sells gas and oil at inflated prices. It is then distributed to unit holders.

Unit holders and debt holders would not countenance raising money to pay distributions. That is the essence of Ponzi.

So a really strange and opaque derivative maneuver gets inserted in the process. Then they sell equity and debt securities to buy derivatives that turn to cash. Then they distribute that cash. Whether interposing the strange derivative maneuver is sufficient to remove the whiff of Ponzi I cannot tell. I report: you decide.

As for the statement the only way that paying $2.4 billion in distributions would be possible if they earned the money - well I just present the GAAP accounts. All they have earned is losses. This company clearly has a different definition of "earnings".

Other Information:

In evaluating this issue, LINN has identified other publicly traded partnerships that purchase derivatives, and all of these companies account for derivatives the same way LINN does.

In fact, LINN has yet to identify any publicly traded partnerships that account for it differently.

LINN’s hedge policy strictly prohibits any speculative trading or manipulation in the hedge book. The company adheres strictly to this hedge policy.

The GAAP accounting is correct. I have said this above. What is unusual is the definition (non GAAP) of distributable amount. I have yet to see any other partnership that estimates its distributable amount in this way - but hey - there are always other things to short as well.

So there.

That Queen Gertrude does protest too much. And she is so transparent.


Tuesday, February 12, 2013

Another day - another strange Gulfport Energy related party transaction

I woke up this morning to the news that Gulfport Energy (NASDAQ:GPOR) is buying another 22 thousand net acres in the Utica Shale from Windsor Ohio - an affiliate of Wexford Capital. The price is about $10 thousand an acre. This is funded by a large equity raise.

This is very similar to a transaction in December 2012 where 37 thousand acres were purchased from Windsor Ohio for $372 million. That was also funded by an equity raise. The 8K describing that transaction contained the following disclosure:
Mike Liddell, Gulfport’s Chairman of the Board, is the operating member of Windsor Ohio. All distributions made by Windsor Ohio are first paid to the Wexford members in accordance with their respective ownership interests in Windsor Ohio until they have received amounts equal to their respective capital contributions. Thereafter, distributions are made 90% to the Wexford members in accordance with their respective ownership interests and 10% to Mr. Liddell. Upon closing of the Acquisition, Mr. Liddell received approximately $2.9 million in distributions from Windsor Ohio corresponding to his 10% interest described above.
It is an open question as to how much money from this equity raise will find its way into Mr Liddell's pocket. The Gulfport Energy press releases do not broach this question.

However - on a cursory look - it appears that the Windsor Ohio members have already received back their capital contributions and on a literal reading of the above quoted 8K a full ten percent of the money paid for this acreage will flow personally to the Chairman of Gulfport Energy.

$22,000,000 is not a bad pay day. I know it is a guess - but hey - Gulfport do not disclose this detail in their press release. Nor is it disclosed in their prospectus for the offering. I telephoned Paul K. Heerwagen IV (the IR officer and contact on the press releases) and asked him the question directly. He hung up on me and did not answer return calls.

But dear Gulfport shareholders - you should have no discomfort: the press release assures us that "the transaction was approved by a special committee of Gulfport’s Board of Directors."


Disclosure: short Gulfport.

Tuesday, February 5, 2013

Comment on the false New York Post story about the law enforcement investigation against Hebalife

About twenty four hours ago I was alerted to a story in the New York Post by Michelle Celarier asserting that Herbalife was the subject of an enforcement action. To quote:

The Los Angeles-based distributor of nutritional products is the subject of a law enforcement investigation, The Post has learned. 
The existence of the probe emerged after the Federal Trade Commission, responding to a Freedom of Information Act request by The Post, released 192 complaints filed against Herbalife over the past seven years. 
The FTC redacted some sections, saying it didn’t have to divulge “information obtained by the commission in a law enforcement investigation, whether through compulsory process, or voluntarily ...”

This story was false. But lets go to the original source - the information released by the Federal Trade Commission (FTC).

The key document - the source of the New York Post story - was on page 719 of 720. Here it is the key bit - a photograph:

To quote directly:

We have located 717 pages of responsive records. I am granting partial access to, and am enclosing copies of, the accessible records. Fifteen pages, and portions of other pages, are subject to two of the nine exemptions to the FOIA's disclosure requirements, as disclosed below. 
I am withholding 15 responsive pages which are exempt from disclosure under the FOIA Exemption 3, 5 U.S.C 552(b)(3), because they are exempt from disclosure by another statute. Specifically, Section 21(f) of the FTC Act provides that information obtained by the Commission in a law enforcement investigation, whether through compulsory process, or voluntarily in lieu of such process, is exempt from disclosure...

The FTC found 717 pages of responsive records. It withheld 15 pages because they were exempt from disclosure because they were found pursuant to a law enforcement investigation.

On this flimsy evidence and no more the New York Post concluded that Herbalife was itself subject to a law enforcement investigation.

The text says nothing of the sort.

Indeed the text proves comprehensively that Herbalife is not subject to a law enforcement investigation.

The way you see that is obvious. When the government asks for documents using a subpoena or the threat of subpoena how many documents do you think you supply? The usual story is truck-loads. Fifteen hundred pages of documents would be typical in a very minor case. Fifteen thousand pages would be more typical. 15 truck loads is not unknown. Discovery is very expensive.

The fact there were only 15 pages of documents gives you the answer you need. These documents may have been found subject to a law enforcement investigation but the law enforcement investigation was not against Herbalife and fifteen pages of documents came out as a by-product.

This was obvious enough to anyone who thought about it - and I purchased the stock for the bounce.

Michelle Celarier - the New York Post journalist - made an amateur mistake driven by simple failure at reading comprehension.

We all make those. Lord knows I have made mistakes. (And when I make them my clients lose money...)

But that is not how Michelle Celarier sees it. She blames the FTC language for her mistake rather than herself. Panicked investors, now wearing an unnecessary loss, might not be feeling quite so charitable towards Michelle and the Post - which I hasten to add is in many other respects a surprisingly fine paper.


General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.