Yesterday, July 1, Linn Energy LP (LINE) and LinnCo LLC (LNCO) announced that the SEC initiated an inquiry and requested documentation concerning:
- LinnCo's proposed merger with Berry Petroleum Company.
- LINN and LinnCo's use of non-GAAP financial measures.
- The company's hedging strategy.
The Linn companies have been under fire due to those hedging strategies, with several in the financial press and some short selling hedge funds expressing the opinion that Linn was not properly accounting for the hedging strategies used by the company. The underlying belief from that corner is that Linn Energy in fact does not generate enough cash flow to support continued dividend payments and those payments come out of the capital raised through equity and debt sales.
To brunt the effect of the bad news, Linn issued an announcement that makes official the start of monthly dividend payments in July.
Linn also reissued via email a May 31 press release that reiterated the companies' continued commitment to the merger between LinnCo and Berry Petroleum (BRY), with a shareholder vote expected to take place sometime in the third quarter and the completion of the merger in the fourth quarter.
What Happens Now?
I am writing this before the market opens on Tuesday, and expect that the LINE and LNCO share prices will take a serious hit on the open. Many long investors who have been waiting for good news will not like the bad news of the SEC inquiry.
The shares go ex-dividend on Monday, July 8, so those who are already short the shares may be covering those positions between today and tomorrow. It will be interesting to see what side wins, the panicked long position sellers or the short-covering buyers.
In the longer term, the inquiry press release included this:
"The SEC has stated that the fact of the inquiry should not be construed as an indication that the SEC or its staff has a negative view of any entity, individual or security."
It seems obvious that all of the interest in Linn over the last few months triggered this review, and if the SEC decides that Linn has done nothing wrong, these issues will be put to bed forever. However, just the fact that the SEC is looking into the stock will probably cause a lot of pain for those investors who have stood by the company while the short sellers have done a very good job of driving down the share price.
If the SEC eventually finds that the Linn companies have not been in compliance with securities and reporting rules, the company will have fooled many, me included. A negative ruling would probably scuttle the Berry merger. My hope is that the SEC completes its investigation quickly, and investors get answers one way or the other. At this point, holding shares of LINE or LNCO is highly speculative.
If you want to get out of one of these two stocks, I would avoid selling this Tuesday morning. With Wednesday as the last day before going ex-dividend, there may be better prices at which to get out by the close of trading Wednesday.
Note: LP companies such as Linn Energy have units and pay distributions. The words stock, shares and dividends may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
LINE data by YCharts
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.