The Securities Exchange Commission has commenced private, non-public inquiry related to Linn Energy (LINE) and LinnCo's (LNCO) accounting methods and proposed merger with Berry Petroleum (BRY).
The inquiry confirms months of speculation that something could be astray about Linn’s accounting methods and hedging activities. In February, Barrons reported that Linn may be “overstating the cash flow available for distribution by not deducting the cost of financial derivatives – mainly put options – from its realized gains on hedging activities.” Linn’s acquisition of Berry Petroleum further complicated matters.
In the ensuing months, LinnCo and Linn Energy, which were formerly slow and steady high yielders, transformed into very public battleground stocks. Short-selling hedge funds pounded both stocks lower on a daily basis and were quite vocal about their anti-Linn thesis, so it’s possible that the constant debate and persistent selling prompted the SEC inquiry.
Linn Energy is an oil and gas company with properties and operations across the United States, most notably in the Midwest and west coast. The company is a notoriously high dividend payer with partnership tax benefits, but short sellers believe its payment is unsustainable because its method of reflecting hedging activities in its financial statements does not comply with the law.
Meanwhile, LinnCo owns units of Linn Energy and exists as a regular corporation. Owning shares of LinnCo instead of Linn Energy appeals to investors with retirement accounts, which pay fewer taxes on stocks with normal tax structures. LinnCo, therefore, is subjected to the same aforementioned issues as Linn Energy.
Both Linn Energy and Berry Petroleum announced on Monday that they are fully committed to finalizing the acquisition, but the fate of the deal remains largely in the hands of the SEC.
Linn Energy shares plunged over 18 percent to $27.27 during trading hours on Tuesday, while LinnCo dropped 17.2 percent to $30.85. With investors in fear that Linn's acquisition could fall through, Berry Petroleum shares slipped 5.4 percent to $40.03.