Linn Energy (NASDAQ:LINE) appears to have cleared its path for restructuring with the unit-to-share exchange with LinnCo (NASDAQ:LNCO) and its settlement with its second-lien noteholders. The restructuring is extremely likely to wipe out the common equity, yet there are still some people buying. However, the fact that Linn hasn't collapsed to zero yet doesn't mean much as even stocks which have been confirmed to be worthless soon by the courts can find buyers willing to pay pennies for it.
I estimate that post-restructuring, Linn Energy could have an enterprise value of approximately $4.5 billion to $5.0 billion. Using this value during restructuring negotiations may result in full coverage of the secured debt. The negotiations with the second-lien noteholders appear to be key for determining what recovery the unsecureds could get.
Restructuring Has Been Telegraphed
Linn Energy has done many things to indicate that it is restructuring soon. It fully drew down its credit facilities. There is language in its filings about substantial doubt that Linn can continue as a going concern. It also skipped its March interest payments and started an exchange that is designed to protect unitholders from cancellation of debt income in the event of a restructuring. Finally, the agreement it reached with second-lien debtholders included a requirement for those debtholders to negotiate a restructuring in good faith. It is pretty much impossible to look at that information and come to a conclusion that Linn isn't restructuring.
There Still Are Buyers
One argument that has been trotted out in favor of Linn is that there are still buyers for its stock/units and that if the news was really that bad, there would be no buyers. I would say instead that there are always going to be buyers for a stock, regardless of how dire the situation is. Some of the buyers may be short-term traders, while others just see a stock that appears cheap (compared to historical prices) without actually doing any due diligence on the company. Even when a company outright states that its common stock is going to be worthless, there are still people willing to purchase the stock.
As an example, Exide Technologies emerged from Chapter 11 restructuring on April 30, 2015. Its common stock was canceled at that time as per the restructuring plan that was confirmed by the courts on March 27, 2015. Despite Exide indicating that the common shares would be canceled and the bankruptcy court approving the plan, its common stock still traded for pennies between March 27 and April 30. A couple million dollars worth of transactions went through after the stock was set for cancellation, with the only unknown being the exact date that the common shares would be cancell]ed.
In the current environment, I estimate that Linn's enterprise value could be around $4.5 billion to $5.0 billion post-restructuring. This is based on a long-term oil price of around $55 and a long-term natural gas price of around $3, which appears to be roughly around the price points that a significant number of other companies are currently being valued at. This also incorporates the remaining value of Linn's hedges.
Reducing its debt to a manageable level would require at least a $5 billion reduction in debt for Linn, while a $6 billion reduction would be more ideal. Reducing debt by that amount would bring Linn's break-even point without hedges down to the $50 to $60 oil range, along with $3 natural gas.
If Linn's enterprise value during restructuring negotiations ends up being pegged at around $4.5 billion to $5.0 billion, that would theoretically leave only a limited amount of value for the unsecured bonds. Linn has $4.5 billion in first-lien debt and approximately $1.17 billion in cash (including restricted cash) along with $1 billion in second-lien debt, which nets out to $4.33 billion in secured debt (after subtracting cash).
The second-lien debt appears to be key to the restructuring plan, since Linn probably needs to convert that to equity to get its post-restructuring debt down to what I think would be a viable level for it going forward. The second-lien debtholders also appear likely to control a significant portion of Linn's equity post-restructuring. If the restructuring negotiations with the second-lien debtholders fail, then it appears that the second-lien debt turns into $2 billion in unsecured debt again, albeit as 12% notes. Linn's common equity is certainly well out of the money and shouldn't expect a return.
I don't think that Linn's common equity has any value. In the case of Linn Energy's units, the value is probably significantly negative due to the tax issues surrounding the units. I don't believe that Linn's unsecured debt is a bargain at current levels either. There are some calculations to work out for the division of assets between Berry and Linn, but overall it would take the higher end of the $4.5 billion to $5 billion valuation range for the unsecured notes to potentially see some upside from current prices. I am staying out of the bonds for now.
Disclosure: I am/we are short LINE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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