Chapter 11 becoming ‘unavoidable’ for Linn Energy

Linn Energy LLC said in a Mar. 15 filing with the US Securities and Exchange Commission that its current financial state is such that bankruptcy may become “unavoidable.”

The Houston independent reported that it would hold off on paying $60 million in interest payments for bonds maturing in 2021 and 2022. If Linn fails to pay in the next 30 days, default may follow.

The firm currently has an aggregate debt load of $9.3 billion, and is using “a significant portion” of its cash flow to pay interest and principal.

The absence of that cash makes it more difficult for Linn “to finance our operations and other business activities, and limits our flexibility in planning for or reacting to changes in our business and the industry in which we operate,” the firm said.

Linn last month reported that it had borrowed the remaining undrawn amount from its credit facility, using $919 million for general corporate purposes (OGJ Online, Feb. 5, 2016). As a result, it said it was exploring “strategic and financial alternatives.”

It said in its filing, “We have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address our liquidity and capital structure, including strategic and refinancing alternatives through a private restructuring. However, a filing under Chapter 11 of the US Bankruptcy Code may be unavoidable.”

In a release detailing Linn's fourth-quarter and full-year 2015 results, Mark E. Ellis, chairman, president, and chief executive officer, added that his firm has “been in discussions with certain lenders in an effort to reach a mutually agreeable resolution and remain focused on right sizing the balance sheet in order to position the company for long-term success.”

Linn reported a 2015 net loss of $4.8 billion, including noncash impairment charges of $5.8 billion. For the fourth quarter, Linn took a net loss of $2.5 billion, including noncash impairment charges of $3 billion.

Plans for 2016

Linn has set a capital budget of $340 million for 2016, including $250 million of oil and natural gas capital expenditures, representing a 44% reduction from that of 2015. The firm also plans to spend $75 million of plant and pipeline capital. Linn expects to fund its oil and gas capital program primarily from internally generated cash flow.

Of its total oil and gas budget, the firm plans to allocate 38% to the SCOOP-STACK play, 23% to optimization projects, 16% to the Williston basin, 13% to California, and 10% to the Green River basin. It expects to spend 34% of its oil and gas budget on nonoperated projects. Linn currently has an overall base decline rate of 13%.

The budget assumes average 2016 production of 980-1,070 MMcfd of gas equivalent, down 14% from full-year 2015 production, which includes 50 MMcfed of marginal well shut-ins. Of the 2016 average, 56% will be natural gas, 30% oil, and 14% natural gas liquids.

As of Dec. 31, 2015, the company’s total proved reserves were estimated at 4.5 tcfe, of which 59% were natural gas, 26% oil, and 15% NGLs. All proved reserves were classified as proved developed, with a total standardized measure of discounted future net cash flows of $3 billion.

The decrease includes 2,379 bcfe of negative revisions of previous estimates, primarily due to 1,776 bcfe from lower commodity prices, 349 bcfe from uncertainty regarding the company’s future commitment to capital, and 302 bcfe from the SEC 5-year development limitation on proved undeveloped reserves.

Those revisions were partially offset by 48 bcfe of positive revisions due to asset performance.

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