This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Shorts Walk the LINE

Stocks in this article: LNCOLINEBRYCHK

NEW YORK ( TheStreet) -- Back when I was a young reporter at the Houston Business Journal, an oil boom was on.

Anyone who could bring up oil could make a fortune. Most of the intrigue in the business involved seismic testing, leasing in the Gulf and the hunt for "elephant" finds in remote locations. The boom ended when prices crashed early in the 1980s and consumers cheered.

With fracking you can get oil and natural gas just about anywhere. The easiest places to get it are where it was found before, like the Eagle Ford Shale play in Texas or the Utica Shale play in Ohio. But fracking has also created new finds, especially gas finds like the Marcellus Shale on the east coast and Oklahoma's Granite Wash.

Keeping money flowing toward both development of properties and to shareholders always leads to creative accounting. Fracking isn't like other forms of drilling -- you have to keep spending in order to keep pumping. Thus, with the ongoing natural gas glut some of the numbers start looking dicey. The action has thus moved from the engineers to the finance guys. Forensic accounting is the new math.

All the bears are looking for the next Chesapeake Energy (CHK), the next acquisition-minded driller whose numbers may not add up. If someone is under-estimating their costs and over-estimating their asset values, shorts are going to kill dreams.

Hedgeye Research is currently trying to kill the dreams of Linn Energy (LINE).

Linn announced in February it is buying another big player, Berry Petroleum (BRY), for what it says is $46.24/share. This would come in shares of Linnco (LNCO), a company Linn created for the purpose of raising capital.

What's wrong with the deal? Here's Hedgeye's bearish case, which analyst Kevin Kaiser gave during a conference call today:

  • Linn is over-estimating the value of its undeveloped "Granite Wash" acreage in Oklahoma and West Texas by as much as 10 times.
  • Linn is under-estimating its lease operating expenses for maintaining production at current levels, artificially inflating earnings.
  • Berry directors are taking shares of Linn for accepting this change in control, rather than Linnco shares their shareholders are taking.

All in all, Hedgeye values Linn at $8.07/share, far from the current price of $30.73. Hedgeye wants Berry shareholders to vote down the Linn merger. Since Hedgeye got involved, Linn stock has fallen from nearly $40/share to its current price, making clever shorts billions. But the stock has kept paying dividends, and now yields an eye-popping 9.67%.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,195.42 +221.11 1.30%
S&P 500 0.00 -2.75 -0.14%
NASDAQ 4,566.1380 +16.9120 0.37%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs