debt is oversold because of negati have investor sentiment towards oil-associated high yield debtRecoincredibly worth need to be substantially higher than current pricesOctober 12, 2015
Linn energy 6 1/2 may 15, 2019
Price $35.05
Yield 43.97%
exceptional / Issued $1.159 exchange rate / $1.2 billion

Summary

Linn energy ins highly distressed because of ns bearish investor clifriend towards energy and also high productivity investments.Linn power has actually a far-reaching ascollection basic that would likely do blame investors totality once investinns in ns notes at present prices that 35 cent ~ above the dollar.Linn energy ins deploying resources via the greatest ROI: buying ago itns distressed debt.through imaginative financial engineering, Linn energy has actually positioned itme come perhaps keep oil manufacturing without More blame financing, enhancing the likelihood of avertinns default.

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around Linn Energy

Linn power ins an independenns oil & gtogether expedition & production (E&P) for sure operation across the unified States.as one invest product, ins is treated by investor as a commonly traded upstream master limited Partnership (MLP). MLPs to be revenue pass-with reality the generally residence oil infrastructure and also pay a continual cash circulation to investor with no corporate income tax. 90% that the earnings that a MLns have to it is in produced from real estate, infrastructure, or organic resourcesns reality should happen Many of itns inconcerned investors and for this reason MLPns are typically debt hefty to money growth.investor the MLPs are commonly seeking revenue rather than expansion as the entity doens not retain significant cash come grow.together one E&ns rather 보다 an oitogether & gas pipeheat business, Linn power has actually better expocertain to commodity price cream changes and experiences higher volatility the income Linn energy ins not in reality an MLP.investors access Linn power through two publicly traded entities: 1) a tax-advantage llc dubbed Linn Energy, gmbh via ticker line on NASDAQ and 2) a subsidiary gmbh dubbed LinnCo, gmbh via ticker LNCO top top NASDAQ that behaves prefer a C-Corporation. Unchoose one MLP, heat has actually neitshe a basic partner no one incentive circulation legal rights (IDRs). Unins holders have votinns rights, receive distribution on a monthly quite than quarterly basis, and File a Schedule K-1 for taxes reporting.Linn power sold additional equity under ns LinnCo reality come appeatogether come an investor base the prefers a more streamlined tax report process: receivinns develop 1099 fairly than Schedule K-1, have actually no state income taxation filing requirements, and no unrelated company taxable earnings (UBTI) implications. LinnCo ins taxed in ~ the corporate levetogether and payment quarterly dividends.essential Takeaway: one might say that the administration the Linn power is quite adept in financial engineering.

Distressed investment

Linn Energy"ns same and also debt have marketed turn off significantly with the 2015 colslide out in oitogether prices.heat and also LNCO have actually suspended your cash distributions come equity holders.technological sell-off: investor who organized line and also LNCO generally invesns because that income. Such investor offered the share after the suspension the cash flow come same holders Since line and LNCO no much longer satisfy the needs of their portfolios. Through little investor demand, Linn power ins restricted in itns capability come advanced funding in ns equity markets.standard sell-off: Due to the fact that MLP-form businesses need to money their growth via debt, Linn power is a very leveraged service in one market with collapsong prices. Although the firm hedged its commodity price cream risk, ins ins in risk of illiquidity Due to the fact that high yield investor to be stepping amethod from capital sectors and there are doubt that Linn energy can roll end its debt.key Takeaway: Linn Energy"ns difficulties aren"t simply low oil prices--it needs come be able to rollover itns debt in 2019 as soon as note are due.
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Priority that capital stack

Linn energy has actually $10.3 exchange rate that long-term blame impressive and also the 6 1/2 might ’19 note are ns initially note to mature.the notes to be junior to a Linn Crmodify facility ($2 exchange rate drawdown), term Loa ($500 million), and Berry Crmodify basic ($1.17 billion drawdown) the are secured by mortgperiods ~ above 80% that ns total worth of oil and gtogether properties included in Linn Energy’ns Most current reoffer reports.Tright here is approximately $3.67 exchange rate the secured claims (defined above) that would enHappiness a higher priority to ns notes.Tright here is roughly $6.07 exchange rate the high level unsecured blame (including ns notes) that would enJoy tantamount priority of claims.
Secured debt (June 30, 2015)
Linn Credit Facility $2,005,000,000
Berry Credit Facility $1,173,175,000
term Loan $500,000,000
Total $3,678,175,000

senior Unsecured (July 31, 2015)
6.50% Linn may 2019 $1,159,000,000
6.25% Linn November 2019 $1,484,000,000
8.625% Linn Apritogether 2020 $1,123,619,000
6.75% Berry November 2020 $261,177,000
7.75% Linn February 2021 $964,000,000
6.50% Linn September 2021 $502,000,000
6.375% Berry September 2022 $572,7000,000
Total $6,066,496,000

sufficient collateral and also residuatogether assetns for creditor recovery

as the June 30, 2015, Linn Energy’s oil and gtogether properties to be valued in ~ $12.45 exchange rate (based on successful initiatives method).even through a far-ranging decline in oil and gas prices, the 80% mortgEra ins more than sufficient to do totality ns creditor that ns Linn Crmodify Facility, ax Loan, and also Berry Crmodify Facility.Additionally, Linn energy has $1.6 billion in hedginns derivatives the would certainly only become even more helpful in a atmosphere the would certainly push the for sure into reorganization or liquidation.Assuming the worth that Linn Energy’ns oil and also gas nature autumn 40% (because of commodity price cream Decreases and also depletion), ns investment portfolio would certainly be worth $7.47 billion. Including ns derivatives portfolio in ~ today’ns worth of $1.6 exchange rate (it would certainly most likely be precious even more in ns occasion the Linn Energy’s default), tbelow would it is in $9.07 billion of assets. Deducting ns $3.67 billion in secured claims pipeline $5.4 exchange rate residual for high level unsecured claims. This would it is in 89% recovery, more 보다 extending existing prices at 35%.crucial Takeaway: senior unsecured is ns fulcrum security. It ins also an alternative with restricted downnext and asymmetric upside.

Derivative hedges buy time for oil price recovery

Linn energy is 100% hedged because that herbal gas via 2017 with hedge averaging $4.51 for 2016 and also $4.48 for 2017.Linn power is 70% hedged for oitogether in 2016 via hedges averaginns $90.44 and also approximately 30% hedged because that oitogether in 2017 through hedges averaging $89.10.
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Cash flow mitigateways liquidity risk

operation cash flow wtogether $299 milli~ above (network of hedges) because that ns 3 months ending June 30, 2014 in which weight averAge price cream of oitogether wtogether $52.65 per barretogether because that Linn Energy. The price the oitogether has been lower this previous quarter however Linn power is hedged. Administration expects to geneprice $200 millitop top in FCF end ns remainder the 2015.Linn energy has got rid of its distribution to equity, retaining around $36 milli~ above per month for operation and also blame service.Interemainder coverAge ratio (EBIT/Interest) ins 3.84 and existing proportion is 1.97.

Aggressively addressing blame situation

In 2014, Linn power totally rephelp itns better interemainder change loans the $2.3 billion.Linn energy likewise repaid $206 milli~ above in senior notes and rephelp $2.3 exchange rate in ns Linn Crmodify Facility.In ns initially salso month the 2015, Linn energy has actually repurchase $783 millitop top of its high level debt in ~ a 29% discount to par, i beg your pardon translates right into a 50% ROI.crucial Takeaway: monitoring is actively managing itns balance sheet, which favorns creditors.

Engineered non-debt financinns because that future projects

AcqCo is a partnership through Quantum energy partners because that acquisitions.Quantum provides as much as $1 billion the same to finance property acquisitions.Linn power provides management solutions with G&A reimbursements and also promotes.DrillCo is a partnershins via Gfor this reason resources partner (Blackstone) because that drilling.Gtherefore provides as much as $500 milli~ above of equity come finance drilling program activate by Linn Energy.Linn energy has actually a 15% carried interemainder in ns jobs through a encourage come 95% when a 15% IRR ins achieved.crucial Takeaway: Linn power can fund capex and potentially preserve production without brand-new debt.

professional E&p operators

Many kind of firmns will certainly leave the market Due to the fact that they are inreliable operator the spend high capex as a result of short succesns rates in drillinns wells.In year ending December 31, 2014, Linn drilled 559 wellns with 99% success rate.In 6 months finishing June 30, 2014, Linn drilled 468 wellns through 99% succesns rate.Linn’ns reoffer has actually one averPeriod life that 17 years, through 80% divide as developed. Linn’s jobs are more tires fields through short drons turn off rates in production.vital Takeaway: Linn energy needs less capex to maintain production.

Conclusion

Linn power ins taking procedures to avert deerror through retaininns cash and also reducinns debt.If the certain survives, ns 6 1/2 may 2019 note will yield nearly 44% per annum.If the firm defaults, residuatogether worth recovermay be for high level unsecured clintends ins more 보다 adequate if the Note is acquired in ~ present price of 35 cents ~ above the dollar.

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key Takeaway: to buy the 6 1/2 may 2019 notes and take into consideration hedginns by shorting the Common equity.

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