Linn Energy LLC (OTCPK: LINEQ) filed an amended reorganization plan and amended disclosure statement (Docket 1257) on December 3. The changes impact noteholders, but equity holders are still not getting any recovery. The natural gas and oil prices on October 31 were used in the company's financial projection analysis, but energy prices have risen sharply since then. Linn Energy redlined its valuation analysis exhibit title that normally is included in disclosure statements, which means there is no documentation to support its estimated $2.35 billion enterprise valuation.
Amended Disclosure Statement
The amended reorganization plan and the amended disclosure plan are included in Docket 1257, which shows deleted (red) and added (blue) statements. This docket is much easier to use instead of the filings that do not show changes.
The biggest surprise in the amended disclosure statement is the valuation analysis is not included. The exhibit title is even redlined and not just left without the actual exhibit included. This seems to indicate that a valuation will not be included in the disclosure statement. One wonders how the company determined the plan enterprise value of $2.35 billion without a complete valuation analysis that used multiples for projected EBITDA, present value analysis, and comparative value analysis.
The EBITDA stated in the disclosure statement for 2017 is $376 million, but that includes a $70 million reorganization item. Factoring out that item, EBITDA is $446 million for 2017. Using multiple of 5x and 7x, the valuation would be $2.23-3.12 billion. So the $2.35 billion enterprise valuation used in the reorganization plan is at the low end of the valuation.
The second major surprise is the estimated recovery by unsecured noteholders of only 16% of their claims. The notes are selling at more than twice that amount. I have absolutely no idea how the company estimated a 16% recovery for unsecured noteholders. The 2nd liens' and unsecured noteholders' total claims are $5.167 billion. The 16% would imply that the new equity was worth only $827 million, since they are getting all the new equity without factoring in the backstop agreement and the management incentive plan.
The disclosure statement was amended from the prior disclosure statement to include projected financial statements based on October 31 prices. Since the price of natural gas at the Henry Hub has risen to $3.41 from $2.65 on October 31 and WTI has risen to $51.68 from $46.86, these October 31 projections may be too low.
Note: 2016 is for the 2nd half only and not the full year.
These are the projected liabilities on the effective date:
These are the prices used in the analysis. They reflect October 31 prices and also reflect discounts from posted prices.
Recent Henry Hub Spot Prices
Recent WTI Prices
Amended Reorganization Plan
The amended reorganization plan completely deletes references to Berry Petroleum's plan. Linn Energy will exit Chapter 11 completely separate from Berry. The amended plan also makes some changes for recovery for various claims, such as convenience and general unsecured creditors. (This claim class does not include unsecured noteholders.) The biggest difference is the number of shares issued under the rights offer.
The number of shares to be issued under the $530 million rights offer was expected to be relative to the $2.35 billion enterprise value. It does not seem that way, as per a statement added in the amended plan:
provided, however, that in no event shall the shares of Reorganized LINN Common Stock issued pursuant to the LINN Rights (including any such shares to be purchased by the LINN Backstop Parties pursuant to the LINN Backstop Agreement), taken together with the shares of Reorganized LINN Common Stock issued by Reorganized LINN pursuant to the LINN Backstop Agreement as part of the LINN Backstop Commitment Premium, collectively comprise less than 50.1 percent of the Reorganized LINN Common Stock outstanding as of the Effective Date.
It would, therefore, seem that the shares issued under the rights would be at least 50.1% of the total new shares issued under the reorganization plan. That would imply the shares that are not issued via the rights offer would be based upon slightly less than $530 million instead of $1.82 billion ($2.35 billion - $530 million). This clearly shifts greater value to the rights and less to the shares not issued under the rights offer. To those noteholders planning to exercise the rights they receive, it does not change the total value of their recovery. To those noteholders who were not planning to exercise their rights, the expected value of their recovery drops. The participants in the backstop agreement are clearly the major beneficiaries of this change, because they will gain more from those rights that they exercise.
The hearing for the approval of the disclosure statement is set for December 8, and the confirmation hearing set for January 24. Currently, 93% of the lenders, 88.2% of the ad hoc group of 2nd lien holders, and 70.0% of the ad hoc group of unsecured holders have agreed to the plan. Ballots are due by January 12.
The cancellation of debt income-CODI tax liability remains an issue for holders of LINEQ, but not for holders of LinnCo LLC (OTCPK:LNCOQ), which is taxed as a corporation. There will be a taxable gain when Linn Energy's debt is canceled on the plan's effective date, as stated on page 97 of the disclosure statement, "The cancellation of Claims against LINN should give rise to cancellation of indebtedness income ("CODI"). Because LINN is a partnership for U.S. federal income tax purposes, such CODI will be allocated to LINN's unitholders..."
There is uncertainty about the amount and the allocation date. It is unclear when LINEQ units will be cancelled. They may not be cancelled on Linn's effective date and may continue to trade until Berry's effective date for its reorganization plan. To make it even more confusing, if LINEQ continues to trade past Linn Energy's effective date, the allocation of Linn's CODI could actually be the first of the month, following the procedure of prior CODI allocation, that the plan becomes effective - and not the effective date. In addition, there could be two allocation dates: one for Linn's debt cancelled and one for Berry's debt cancelled.
October Monthly Operating Report
Linn Energy filed its October monthly operating report (Docket 1233) on October 31. These reports do not follow GAAP and are often poor quality. Natural gas prices were strong in October; but in early November, there was a sharp drop in natural gas prices that is expected to have a negative impact on the November MOR, which will be released at the end of December.
Both LINEQ and LNCOQ are rated a Sell because there will be no recovery under the reorganization plan. LINEQ holders need to make sure that they do not incur a CODI tax liability and should, therefore, should sell before the end of January to avoid being a holder of record on February 1. The reorganization plan's effective date could be in February.
If investors forecast continued strong energy prices, the Linn notes warrant consideration by those willing to participate in the rights offer. If noteholders are not planning to participate in the rights offer, it is important to sell the notes before the effective date.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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