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Takeaway: We believe LINE has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).

What a difference a couple of days can make. In case you haven’t been following this story, the price of LINN Energy (LINE) has cratered the last two days.

Linn Energy – A LINE in the Sand? - LINE 070313


What triggered LINE’s plunge? News that the SEC is now investigating the company’s use of use of non-GAAP financial measures, its hedging strategies, and its proposed acquisition of Berry Petroleum Company (BRY) jointly with its affiliate, Linn Co, LLC.

According to the press release put out by LINN Energy Monday night:

The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.

For the record, Hedgeye Energy Analyst Kevin Kaiser has been all over the “Old Wall Street” aggressive accounting practices over at LINN Energy. Kaiser first sounded the siren back in February when the stock was trading around $38. It’s currently trading around $23 dollars.

We have been relentlessly banging the drum of transparency, and shining the light of accountability for all investors who bothered to listen. It has not been an easy road. All along, we have been attacked and vilified by various high-profile members of the mainstream media, big shots on Wall Street and angry people long LINN on Twitter. These attacks didn’t weaken our resolve. Rather, it strengthened our determination to get the truth out.

Fortunately, it now appears the market has come around. To paraphrase a line from Jim Chanos, “We are not the only guys crying in the wilderness” about the accounting at LINN now. While we certainly do not celebrate the losses of investors long LINN Energy, we do celebrate the market holding this company accountable. We don’t like it when companies play games. It’s bad for the markets and it’s bad for America.

For the record, Hedgeye believes this SEC inquiry puts the proposed LINN/BRY merger at serious risk. And yes, we believe the stock has room to fall much further. In fact, Hedgeye believes that fair value for LINE (LNCO) is around ~8.00/unit (share).

We’re not done with LINN – we think this story is far from over.