SUNDAY MORNING COFFEE AND LINN ENERGY

Lots of chatter about Linn Energy's earnings as to what the numbers mean. The initial reaction is to look at the earnings or lack there of and react negatively. But remember this is a MLP and the important number is DCF (distributable cash flow). Also some people are jumping on the hedging losses. These are marked to market numbers out to 2012. These are non cash charges! Say for example i own a stock and long term put to protect it. The stock price rises and the put declines but still has value. On paper i would say that the put is worth zero even though it actually has some value. When the put does expire i would have already written down the loss of the insurance and retain the asset which has appreciated in value. Or say the asset declines in value next year and the put appreciates i can exercise that put on the asset which gives me the higher price and then take the profit. That is why it is considered a non cash loss and has no impact on EBITDA, DCF, and everything else going foward.

I guess the bottom line is what happens tomorrow when the stock opens. Frankly if the numbers were really bad would they have re-iterated the 63 cent distribtution which is a 6 cent increase from this quarter? I don't think so. The stock is trading at an 8.4% yield and a going foward yield of 9.2%. or nearly 5 points above the 10 year rate. A price of 35 brings the yield down to 7.2% going foward and brings it more in line with companies that are growing distributions. The only thing negative in my view is that the overall market enviornment just sucks.

Btw i forgot to post about this but Devon Energy (DVN) in their earnings report last week announced that it will not be going foward with an MLP ipo of assets citing market conditions and the fact that it was no longer advantageous for them to do it. At least that means less stock supply coming on.