Linn Energy Just Can't Catch A Break

Mar.24.14 | About: Linn Energy, (LINEQ)


JPMorgan has recently downgraded Linn Energy to neutral from overweight.

This downgrade follows Jim Cramer’s capitulation on the stock.

In addition, a recent Bloomberg article highlights the risks involved with MLPs such as Linn Energy.

Linn Energy’s stock has fallen over 10% in recent days and may face further downside pressure.

Linn Energy (LINE) seems to be losing friends almost daily now. About two weeks ago, the stock was absolutely hammered due to the news that Jim Cramer had turned bearish the stock. Do note that Mr. Cramer did not specifically tell investors to sell Linn Energy's stock, rather he recommended shifting funds to the "safer" Kinder Morgan Energy Partners (NYSE:KMP). However, his subsequent actions, such as the exiting of Linn Energy and LinnCo (LNCO) from his charitable trust portfolio, made it clear that he was no longer a Linn Energy bull.

JPMorgan Chase downgrades Linn Energy: Expect more pain

Adding to Linn Energy's struggles is the recent downgrade from JPMorgan Chase to neutral with a $30 price target. This downgrade is especially painful given that the firm had only recently upgraded Linn Energy to overweight with a $35 to $36 price target back in January.

As for specific reasons for the downgrade, JPMorgan's Spiro Dounis noted that Linn Energy's guidance missed estimates and that the DCF coverage ratio left little room for error. Mr. Dounis did mention that were was a potential positive catalyst via the planned midland divestment. However, the "timing and execution increase uncertainty has open the door to potential equity/debt raises should monetization take longer than expected."

This downgrade by JPMorgan is eerily similar to the Howard Weil downgrade back in February. That firm had a similar bullish rating on the stock ("Focus Stock") before having to lower the rating to ("Sector Outperform") as a result of the disappointing DCF estimates for 2014. Linn Energy's stock promptly fell 5% on that news.

Bloomberg seems to be quite bearish on the MLP sector

In addition to the JPMorgan downgrade, Linn Energy may be struggling due to last week's Bloomberg article on MLPs.

The article basically noted that many unsophisticated investors (read retail investors) were piling into MLPs due to their high-yields and tax advantaged structure without necessarily considering the risks involved.

Over the past few years, MLP valuations have soared, prompting a record 21 MLP IPOs in 2013 for a record $8.8 billion.

Such as was seen with Boardwalk Pipeline Partners LP (NYSE:BWP), pipeline MLPs can indeed see their cash flows decline. Boardwalk essentially lost 50% of its value due to shocking the market with its 80% distribution cut back in February.

As for Linn Energy specifically, Bloomberg noted that the company has previously been in hot water with the SEC due to its aggressive use of hedges and its calculations for DCF. However, this blurb is frankly the definition of "old news" as many of these issues have been cleared up with the closing of the Berry Petroleum merger.


One has to imagine that the analysts at JPMorgan Chase may be trying to keep up with the current market sentiment and price action, which has turned extremely bearish against MLPs.

In addition, as noted in the downgrade, Linn Energy's fundamentals have come under pressure, given the rather lackluster Q4 2013 results and the weak 2014 guidance.

Linn Energy clearly needs to address the concerns regarding its 2014 DCF projections as two of its biggest supporters (three if you count Mr. Cramer) have now downgraded the stock.

That being said, I believe that Linn Energy may be able to brush off these concerns if it manages to post a decent quarter and/or is able to sell off its Permian basin Midland assets.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long KMI. 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.