Last Thursday, Linn Energy surprised Wall Street by announcing its intention to suspend its distribution at the end of the third quarter because of weak prices for oil and natural gas. The news sent the highly leveraged firm’s shares down 37%; they closed the week at $4.04.
Barron’s called Linn’s accounting aggressive two years ago when the shares were $38 (“Twilight of a Stock Market Darling,” May 6, 2013).
Photo: Courtesy of Linn Energy
Linn (ticker: LINE) is structured like a master limited partnership and pays a distribution, the MLP form of a dividend. It has long been a favorite of retail investors, who prized it for its payout. Linn has been paying a monthly distribution at a $1.25 annual rate since the start of this year, when it was cut from a rate of $2.90.
Despite the stock’s decline, Linn is no bargain. Given that debt stood at $10.3 billion at the end of the second quarter, ultimately there may be little or no value to Linn’s equity, now worth $1.5 billion.
The company faces financial pressure because the bulk of its cash flow is coming from above-market energy hedges that will roll off in the coming years. It has current-year hedges on gas at $5 per million BTUs (British thermal units), and on oil at around $88 a barrel. Current market prices are below $3 per million BTUs and $50 a barrel for oil.
Linn said Thursday that it is focused on debt reduction, announcing it had repurchased $599 million of public debt in July for 65 cents on the dollar.