mplaut

Barron's Finds a Win in Linn

Pinelli is right about LINE. If you look at EPS you will be fooled. Because of LINE's hedges, which fluctuate with the price of the commodities being hedged (gas and oil), the EPS has gone up and down in the past year very wildly. However it is all paper gains and paper losses. When oil and gas shot up in the first half of the year, LINE's hedges showed huge paper losses since they were below the current price. But that made no difference to cash flow and would never have made any difference. If the price had held up, LINE would have just produced and sold at the current price and paid the difference between its hedges and the spot price and kept the hedge price.

Now that the price has come down, they recorded large mark-to-market gains, but cash flow is steady because of the hedges. [Although note that LINE reset some of the hedges during the high prices to take advantage of the rise.]

LINE actually has about 20 years of reserves at current production levels, and can grow production by 4-5% without new acquisitions, funding the drilling from cash flow.

Insiders have been net buyers of the stock over the past half year. Michael Linn sold a small amount of stock for tax purposed but he still owns over 4,000,000 shares.