Things have gone from bad to worse for Linn Energy (NASDAQ:LINE) (NASDAQ:LNCO). The company just announced plans to explore strategic alternatives to strengthen its balance sheet and maximize the value of the Company. The wording in the press release is vague but the message is clear: Linn Energy is near the breaking point.
A few quick takeaways:
Likely restructuring is in the works
From the release, Linn Energy suggests that it needs a "comprehensive solution" to fix its balance sheet and improve its financial position. The only plausible way for this to occur in the current energy price environment is for the company to undergo some form of restructuring. Indeed, Linn Energy hired Lazard as its financial adviser, a firm widely known for handling restructuring and recapitalization cases in the energy sector.
As for how exactly Linn Energy would restructure, we simply do not know. The company provided no details as to what alternatives it is looking at. Though, given Linn Energy's large debt load and limited access to capital, it appears the available options are very limited.
The most likely scenario for Linn Energy would be a Chapter 11 reorganization "bankruptcy" coupled with a possible recapitalization. In this event, the common equity and unsecured debt would become essentially worthless.
Other possible, but much less likely, ways Linn Energy can fix its balance sheet are to sell assets or receive some form of capital infusion from a private equity firm.
Though, there have not been many buyers looking to buy energy assets at current prices. Asset sales would also lower the size of the reserve-based credit facility, reducing their impact on lowering debt. Furthermore, Linn Energy's previous discussions with PE firms such as Quantum Energy Partners have not led to any significant developments.
Linn Energy's equity is likely worthless
As I noted above, Linn Energy's common equity is very likely to become worthless in the event of any sort of restructuring. While the hedgebook is certainly valuable, Linn Energy is facing major medium-to-long-term pressures on its cash flow. The company has ~$6 billion in debt coming due by 2019. Yet, after the distribution suspension, yearly cash flows were coming in at ~$550 million, with that figure dropping in 2016 due to hedges rolling off and oil falling even more. This leaves at least ~$4 billion "gap" that Linn Energy is unlikely to be able to fill.
Furthermore, at $30 oil and current strip pricing, Linn Energy assets are likely not enough to cover the ~$9 billion in total debt, while the Debt-to-EBITDA figures were likely to head higher, which could result in covenant trouble.
Indeed, it appears even the unsecured senior noteholders are likely to face a significant haircut or become worthless in the event of a Linn Energy restructuring. Many of these bonds were already trading at under 15% of par. This tells us that many of Linn Energy's bondholders have little faith in getting their money back.
Move to max out credit facility indicates cash flow troubles
As for Linn Energy's move to max out the credit facility, borrowing the remaining $919 million, this is not a good sign. If the company were hunkering down it would be more beneficial to keep as much capacity on the revolver as possible. Linn Energy did not mention what it plans to use this cash for. Though, my hunch is that the financial firms it hired did not come cheap.
Company discussed employees in its statement, not equity holders, a bad sign
Lastly, the following statement from CEO Mark E. Ellis is fairly telling in that it does not mention Linn Energy equity holders at all. Rather, it is there to reassure employees and others involved in the day to day operations. This is very concerning and reads very much like a statement made by a company near insolvency.
"We have a very talented workforce, and I am proud of everything that this team has been able to accomplish. We currently have adequate resources to continue the efficient operations of our assets with the support of all our vendors, suppliers and partners while we work through these strategic alternatives."
Needless to say, this news is a major negative for Linn Energy. I see the most likely outcome from this announcement is for some sort of prepackaged bankruptcy or other form of restructuring in the next few months. As of this writing, shares of Linn Energy are down over 30% in after hours trading while the unsecured senior notes were already trading at considerable discounts to par, indicating just how severe this news is.
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