Don’t play poker with a guy named Doc. Don’t eat at a place called Mom’s. And don’t make big bets on stuff you don’t understand. That’s the lesson of Linn Energy LLC (NASDAQ:LINE). Linn Energy LLC (NASDAQ:LINE) fell hard this week after admitting that the SEC was investigating its accounting and its proposed acquisition of another exploration company, Berry Petroleum Company (NYSE:BRY). The company had a deal to buy Berry Petroleum Company (NYSE:BRY) for shares in its affiliated company, LinnCo LLC (NASDAQ:LNCO), valuing Berry Petroleum Company (NYSE:BRY) at $46.24/share.
A short-seller called Hedgeye, run by Keith McCullough, has been hammering on Linn Energy LLC (NASDAQ:LINE) since February, with chief energy analyst Kevin Kaiser holding conference calls where he has said the company is worth, not the $40/share it was worth then, the $35/share it was worth last month, or the $25/share it’s worth today, but more like $8.07/share. McCullough, meanwhile, has been backing his man to the hilt, sending out disparaging tweets about financial reporters who don’t fall in line.
The Truth is Complicated
Getting the truth on the company leads you quickly into the weeds of limited partnerships, cost estimates, and valuation estimates in the age of fracking.
Fracking is a gusher for oil companies, but it’s not the way they did business in the past. When you push water and sand at high pressure into a wellhead, cracking the rock thousands of feet underground, your flow of oil and gas coming back is going to be much more uncertain than when you were just sticking a tube into the ground and sucking.
For this reason Limited Liability Company (LLC) structures like Linn have become popular, as a way to get shareholders the maximum return on their money as possible, as have hedging strategies meant to get the best price for what is produced. In other words, these are not long-term plays.
Hedgeye.com senior energy analyst Kevin Kaiser has been hitting the company since February, alleging that its assets in the Granite Wash play of Oklahoma and Texas are worth just a small fraction of what Linn Energy LLC (NASDAQ:LINE) claims, and that it is dramatically under-estimating the cost of maintaining production. He says the company has been trying to use its credibility with investors to buy other, larger producers, then hedge and milk those assets in order to buy still more. (Full disclosure. I covered one of these sessions and wrote about it.) This sort of thing tends to get personal.