Linn Energy LLC (NASDAQ:LINE): in the line of press-fire
This year, Linn Energy LLC (NASDAQ:LINE) has been the target of a huge amount of negative publicity. Negative research reports, negative articles that Barron’s published have been perennial all of 2013. It goes without saying that even otherwise unshakeable investors will lose patience and faith in LINE. Ever since it went public, the company has paid a distribution without fail, every single quarter. The latest distribution payment that many investors received was around 30 percent higher per unit than what it was at the outset.
It’s strange that a large part of this negative research is screaming off the roof-tops that LINE will chop that distribution. This is one company that did not deviate from distribution right through the U.S financial crisis while most other distributions and dividends across other industries had been chopped. The latest breaking news about the company is that it is finally coming clean on derivative costs, which indicates that LINE is over-stating its cash flow. One article even ends up calling it a “surprise disclosure” that had been “buried in a recently regulatory filing.” The so called buried disclosure features in the registration statement for its joint deal with LinnCo for Berry Petroleum. It says that there are mark-to-market losses on commodity derivatives.
What are commodity derivatives?
Commodity derivatives are essentially investment tools and investors can profit from certain items without actually possessing them. This kind of investing dates way back to 1848 when the main idea behind them was to provide farmers a risk protection means. They could promise to sell their crops in the future at a pre-arranged price.
The current day commodity derivatives’ trading is very popular with those outside the commodities industry. Price speculators are the majority users of this particular investment tool. These speculators generally focus on supply and demand and attempt to predict whether prices will rise or fall. When the prices of a particular commodity head in their favour, they profit. If price heads the other way, they lose money. A derivative contract buyer buys the right to exchange the commodity for a specific price at a future date.