As word spread on Thursday that Linn Energy LLC planned to suspend regular distributions and dividends to its investors indefinitely, those investors took to the trading desk.
Linn Energy (Nasdaq: LINE) took a 26 percent hit on its units, dropping to $4.76 each, which was slightly above the company’s 52-week low of $4.65 per unit, set July 29. Similarly, the unit price for Linn Co LLC (NYSE: LNCO) dropped 29 percent to $4.41 per share, just above the previous day’s 52-week low of $4.38 per share.
In a conference call with analysts, Linn executives explained the move would save the company $450 million. The company also intends to buy back $599 million in senior notes at a 35 percent discount. Year-to-date, the company has repurchased about $783 million in senior notes.
Linn is one of a handful of upstream master limited partnerships (MLPs), which are prized by investors for their predictable and stable distributions.
Looking ahead, Linn is hedged 90 percent for the rest of 2015 at an average of $88 per barrel. The company is hedged about 70 percent in 2016 with an average price of $90 per barrel, all of which gives Linn a hedge book of an estimated value of $1.8 billion, as of July 28, 2015, according to a statement from the company.
Still, Yorkville Capital Management analyst Will Hershey said the market reaction to Linn’s unit price wasn’t unusual. When New Source Energy Partner LP (NYSE: NSLP) suspended their cash distributions July 29, their unit price ended the day with a 52-week low of $1.38 per unit.
Hershey said other players will notice the declines, too, and they will stave off suspending distributions for as long as possible.
“It depends on what [other MLPs] are trying to do. If they’re trying to be long-term prudent—and it’s too little, too late for Linn—then in the short term, those other players will be more hesitant,” Hershey said. “[Linn] is in survival mode. The fact they’re not paying a distribution, and not issuing equity here shows they’re just trying to survive.”
The question for Linn now is whether they can get their debt down with outside financing, maybe even taking on second lien debt. Hershey said the company is levered up to $10.3 billion, but notes that it has less than $2 billion in equity.
Hershey said the MLP structure with its predictable payouts will likely come under significant scrutiny.
“But if it’s done right, it can work,” he said. “Now, it’s a flawed structure. If [MLPs] had a variable distribution rate model, it could reflect these lower [commodities] prices.”
(Editor’s Note: Linn Energy did not return Rigzone’s calls Thursday.)
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