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In footnote #3 on page 257 of LINN Energy's (LINE, LNCO) Form S-4/A released this morning (June 4, 2013) is a new, critical disclosure.  We highlight it below:

LINN Energy Discloses New, Critical Information - linn 1

 

We now know exactly how much LINN's controversial put option accounting method has contributed to "Distributable Cash Flow (DCF)" for prior periods.  In the most recent quarter (1Q13), 29% of DCF was generated by LINN's unique put options accounting method, which we believe is inappropriate and misleading, as described ad nauseum in our prior research - see slides 18 - 29).  

 

Importantly, the % of DCF generated from this accounting method has been increasing.  In 1Q12 it was 16% of DCF; for the three quarters combined 2Q12 - 4Q12 it was 24% of DCF; and in 1Q13 it was 29% of DCF.

 

Excluding premiums paid for put options settled in 1Q13, DCF/unit was only $0.46, for a coverage ratio of 0.63.  And that's saying nothing of the massively understated "maintenance CapEx" figure (which there is also some new disclosures on in today's S-4/A)...

 

LINN Energy Discloses New, Critical Information - linn 3

 

We had previously estimated that the figure would be ~$120MM per year, or $30MM per quarter, for 2013 and beyond.  It appears that we were too conservative with that estimate.  If we annualize the 1Q13 number of $43MM, that's $172MM in 2013 and 25% of guided DCF ($681MM).

 

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As a reminder, this is what LINN's CFO Kolja Rockov said on this very topic when I questioned about it at the OGIS NYC break out session on 4/15/2013:

 

Kaiser: “On the 2013 hedge book, what’s the cash cost of the put options that expire in 2013?”

Rockov: “There is none.  Every put that we’ve ever bought we paid for with cash up front.”

Kaiser: “Yeah, what did that cost you, for the ones that will expire in 2013.”

Rockov: “Oh.  I don’t know exactly.  It’s probably $100 million-ish a year, if I had to guess.”

Kaiser: “$100 million?”

Rockov: “Yeah.  I mean, because they weren’t all bought in one time period, they were bought over the last several years, so I’d have to go back and look.  I’m not…  But somewhere in that magnitude.”

 

Compared to the new disclosure, his "guess" appears a little light...

 

Kevin Kaiser

Senior Analyst