What Led to Linn Energy’s Bankruptcy?



Linn Energy’s high leverage

Until the beginning of the rout in energy prices, Linn Energy (LINE) borrowed heavily to fund its organic projects and acquisitions. The internally generated cash flows were mainly used for distribution payments. This resulted in a significant rise in its indebtedness in recent years. Linn had a total outstanding debt of ~$10 billion sitting on its balance sheet by the end of the fourth quarter.

Linn Energy’s distributions

Linn Energy is structured as an MLP. It continued to distribute most of its cash flows until October of last year despite its huge leverage and volatile cash flows. The partnership might not have anticipated a prolonged low commodity price environment. Otherwise, the cash flow might have been used for debt repayments or to fund capex.

Linn Energy’s commodity price exposure

Linn Energy, like other upstream producers, has its earnings related to commodity prices (UNG). Linn Energy reported a loss of $2.5 billion, or $7.05 per unit, in 4Q15—compared to a net loss of $155 million, or $0.47 per unit, in 4Q14. This resulted from a significant decline in commodity prices. This caused a decline in Linn Energy’s ability to service its debt and interest payments. The partnership recently deferred its interest payments due on Senior Notes, which it paid before the expiration of a 30-day grace period. However, restructuring of Linn Energy’s balance sheet under bankruptcy protection seemed a permanent solution for quite some time.

Linn Energy’s peers

Linn Energy’s peers, including Breitburn Energy Partners (BBEP), Vanguard Natural Resources (VNR), Memorial Production Partners (MEMP), and EV Energy Partners (EVEP) are facing a similar or a slightly better situation in terms of liquidity and leverage.

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