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Why Did Linn Energy File for Bankruptcy Protection?

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Linn Energy filed for bankruptcy protection

Linn Energy (LINE) and LinnCo LLC (LNCO) filed for protection under Chapter 11 of the Bankruptcy Code on Wednesday, May 11. The partnership seeks “to implement the terms of the “Restructuring Support Agreement” under bankruptcy protection. Linn entered into a Restructuring Support Agreement with creditors amounting to 66.7% of the principal amount outstanding. According to the agreement terms, a new $2.2 billion term loan credit facility tied to the partnership’s reserves would be issued.

Linn Energy joined dozens of other upstream producers that filed for bankruptcy since the rout in energy prices (USO). We’ll look at the reasons for Linn’s failure in the next part.

Market reaction

Linn Energy’s shares lost ~25% in the late trading hours on Wednesday following the announcement. Until the Market closed on Wednesday, Linn Energy had lost 97.5% of its Market value in the past year. It was trading close to $0.33 per unit. Linn Energy’s peers Memorial Production Partners (MEMP), Vanguard Natural Resources (VNR), and EV Energy Partners (EVEP) have lost 85.2%, 91.0%, and 85.2% during the same timeframe.

Linn Energy’s bankruptcy isn’t a surprise to its investors. Industry participants started speculating about Linn Energy’s bankruptcy when the partnership announced its plans to explore strategic alternatives to recover its balance sheet in a press release published on February 2, 2016. Also, the company announced “restructuring under a chapter 11 plan of reorganization” as a potential alternative for restructuring its debt before filing for bankruptcy.

Management’s commentary

The partnership expects its operations to continue “throughout the Chapter 11 process.” According to Mark E. Ellis, Linn Energy’s CEO, “Like many others in our industry, LINN has been impacted by continued low commodity prices. We believe that these steps will provide us the financial flexibility to successfully manage in the current commodity price environment and when combined with constructive agreements with our remaining creditors and potential third party financing, will provide a platform for future growth.”

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