The Ghost of Charles Ponzi Haunts Linn Energy LLC (LINE)

Berry Petroleum Company (NYSE:BRY)’s production of approximately 240 MMcfe/d will increase Linn’s production by 30%. It also has 204.2 million barrels of proven oil reserves and 425.5 billion cf of gas. That adds to Linn’s 470 million barrels of liquids and 2.5 trillion cubic feet of gas. Berry Petroleum’s cash flow from operations was $501.4 million last year.

The acquisition was to be funded with LinnCo shares –1.25 shares for each share of Berry Petroleum Company (NYSE:BRY). As LinnCo price drops, they could issue more shares or sweeten the deal with part of a $2 billion credit facility. Bears are betting the deal will be scuttled putting increased downward pressure on Linn Energy and LinnCo’s share price.

Ponzi? Not so much

Linn is not a Ponzi scheme and the accounting complies with conventions used in MLPs/LLCs. Since the distribution starts with adjusted EBITDA it may be subject to both increases and decreases with the rise and fall of earnings. It’s not a deathblow to its business if it subsidizes the distributions with equity and debt if the return exceeds costs of capital.

As it expands assets, payouts will be covered with operating cash flow. Accusations of fraud and a Ponzi-like structure are unwarranted and unfounded.

jean graham has shares of Linn Energy and Kinder Morgan. The Motley Fool has no position in any of the stocks mentioned.

The article The Ghost of Charles Ponzi Haunts Linn Energy originally appeared on Fool.com.

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