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TheStreet Open House

Shorts Battle Over Linn

NEW YORK ( TheStreet) -- Linn Energy (LINE - Get Report) has become a news story without much news, courtesy of TheStreet founder Jim Cramer and the very aggressive short war being engaged by Barron's magazine and a research firm looking to make a name for itself.

So the battle over Linn is pitched, but let's take a look, not as an analyst but as a trader should -- trying less to find a winner in the numbers and rhetoric, but instead understanding the trading psyche that encircles this beleaguered name.

First, understand that Linn uses the Master Limited Partnership structure in a very unique way and some could argue it abuses this structure, both in the tax advantages it gains and the distributions it looks to pass along to its shareholders. I won't opine on whether turning an energy company into a registered MLP is a fair or unfair organizational trick, but I will say that it can make proper valuation of this name difficult for the retail investor -- there is no other energy company quite like Linn.

The retail shareholder is what the stock action has been all about. Linn is not an institutional name -- its holders are mostly all retail punters, easily frightened and sensitive to "bear raid" activity. With almost 5% short interest in the stock, there is a good financial reason for certain funds to very much want to see those shares go down.

Barron's has found fault with two aspects of Linn bookkeeping -- one, with the accounting of put options that Linn uses to augment the sale price of its natural gas production, using options that are financially priced as assets in the same way that it values outright physical production. Again, while this procedure can be seen as troubling because it is unique to Linn, I do not see the problem with it, as real assets and real production are directly accounted for with financial contracts. Second issue: Some researchers have had difficulty with the production value estimates of Linn's Granite Wash acreage. But using pricing for recent sales in the Granite Wash under "fire sale" conditions is equally unfair at valuing Linn assets.

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