Linn Energy: Restructuring Plan Calls For Current Equity To Be Wiped Out

| About: LinnCo, LLC (LNCOQ)

Summary

Linn's restructuring plan calls for its current equity to be wiped out and new equity to go to unsecured and second-lien creditors.

Linn's interest costs may be reduced to $60 million per year from $425 million per year (excluding Berry debt) in late 2015.

Unhedged breakeven point appears to be below $50 oil and $3 natural gas, leaving Linn quite competitive in the current pricing environment.

Linn's equity has surged recently, apparently due to the ruling in favor of an equity committee for BreitBurn.

Linn does have some undeveloped SCOOP/STACK acreage that may add value. However, the estimated value of that land is not significant enough for the current equity to have value.

Linn Energy (NASDAQ:LINEQ)(OTCPK:LNCOQ) is progressing with its restructuring plans and recently announced that it had entered into a restructuring support agreement with some of its second-lien and unsecured noteholders, and also announced amendments. It also has updated its creditor presentation to provide more current information about expected production levels and cost.

Assuming that it can maintain production (as standalone Linn) at around 300 MMcfe per year as outlined in its presentation, Linn looks quite competitive post-restructuring, with an estimated unhedged breakeven point of roughly $2.80 natural gas and $47 oil. Linn may have only $60 million in annual interest costs going forward compared to over $400 million (excluding Berry debt) as of late 2014. That makes a huge difference in terms of its breakeven point.

Restructuring Results

The restructuring proposal calls for Linn to wipe out its current equity (both LINEQ and LNCOQ will be worthless under the plan) and issue new equity to be split between the second-lien debt holders and unsecured debt holders with a roughly 40%/60% split, although general unsecured claimants will also get new equity. This is also subject to dilution from the employee incentive plan and a rights offering that intends to raise $530 million. Second-lien and unsecured debt holders and general unsecured claimants may participate in the rights offering. Linn's unsecured and second-lien debt will be wiped out in exchange for the new equity.

Debt And Interest Costs

The latest information indicates that Linn Energy plans to pay its $1.939 billion plus accrued and unpaid interest in credit facility lender claims with cash on hand (Linn forecasts $549 million in total cash at the end of 2016) and at least $500 million from its proposed rights offering. This may allow Linn to emerge from bankruptcy with $1 billion or less in debt.

Linn will have a $300 million term loan at LIBOR + 750 basis points and a revolving loan with an initial $1.4 billion borrowing base with an interest rate of LIBOR + 350 basis points. There is also a commitment fee of 0.5%. Cash interest costs will be approximately $60 million per year if Linn has $1 billion in initial debt (including $700 million under the revolving loan). This is a massive reduction from the $425 million in Linn (excluding Berry) interest costs in late 2015.

Unhedged Breakeven Scenario

I previously estimated back in May that Linn's unhedged breakeven point would be around $3.25 natural gas and $55 oil post-restructuring, based on Linn's production and cost projections at the time. It appears that Linn's October presentation forecasts significantly higher future production levels. When combined with the lower projected interest costs after the further expected paydown of Linn's credit facility, Linn's new post-restructuring unhedged breakeven point may be reduced to around $2.80 natural gas and $47 oil. Linn is expected to reach around $1.09 billion in revenue at those prices based on its projected 2018 production levels of approximately 300 MMcfe.

Units

$/Mcf or Bbl

$ Million

Natural Gas (MMcf)

182,366

$2.60

$474

Oil (MBbls)

9,936

$43.00

$427

NGLs (MBbls)

9,667

$15.35

$148

Other Revenue

$45

Total Revenue

$1,094

Click to enlarge

Costs are taken from Linn's updated projections for 2018, although I have used average 2017 to 2020 capital expenditures in order to smooth it out. Cash interest is lower than Linn's projections since it incorporates the effect of paying down Linn's debt with the proceeds of its rights offering.

$ Million

LOE And Other

$334

Transportation

$179

Taxes, Other Than Income Taxes

$100

Net G&A

$124

Net Other Expenses

$4

Capital Expenditures

$280

Cash Interest

$60

Cash Income Taxes

$10

Total Expenditures

$1,091

Click to enlarge

With Linn's late 2015 interest costs, its unhedged breakeven point would be roughly $65 oil and $3.75 natural gas. The $365 million reduction in annual interest costs makes a major impact on Linn's viability in the current environment.

Conclusion

The approval of an equity committee in BreitBurn Energy Partners' (OTCPK:BBEPQ) case has apparently led to speculation that Linn's equity might be worth something despite the restructuring agreement to wipe out the current equity. While I am still skeptical of there being value remaining for BreitBurn's equity (particularly its common equity), it does have "hidden" assets that appear to be worth a substantial amount. BreitBurn's Midland Basin acreage could be potentially worth around 30% of its net debt. Linn divested its Midland Basin acreage in 2014 and 2015, apparently leaving it with only some SCOOP/STACK acreage as potentially desirable "hidden" assets. Linn's SCOOP/STACK acreage is mainly located outside of the main activity areas though, and probably aren't worth much more than 10% of Linn's net debt. That makes it unlikely that a case can be made for the debt to be covered. This leaves no value for the current equity under current market conditions.

With the major reduction in Linn's interest costs, it appears that it can be quite competitive going forward with a breakeven point of under $3 natural gas and $50 oil. Linn was crippled before by a huge amount of debt and interest costs, combined with substantial distribution payments. As a corporation with relatively modest interest costs going forward, Linn can probably generate positive cash flow and/or increase production levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in LINEQ, LNCOQ over the next 72 hours.

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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.