What: After investors bailed on LINN Energy, LLC (LINEQ) yesterday due to the company's surprise suspension of its monthly distribution, analysts are following them out the door today. So far, two well-known Wall Street firms have downgraded the company, which is adding to its woes and sending units tumbling once again.
So what: Analysts from both Credit Suisse and J.P. Morgan downgraded LINN Energy's units today after the company suspended distribution payments. Both previously had neutral ratings on the company, but now rate LINN underperform and underweight, respectively. In a sense, both firms are throwing in the towel after the company has continued to disappoint investors, with the distribution cut being the biggest disappointment yet.
That said, the reason the company is suspending its payout is because it needs to preserve cash amid the downturn in the oil price. This is after the company, like so many of its peers, was caught ill prepared to weather a steep and protracted downturn in oil, as it has a mountain of debt that was used to acquired oil and gas assets over the past few years. While the company recently bought back $599 million of debt for a 35% discount, it still has over $10 billion debt outstanding, which is a significant weight in the current oil market.
Now what: Given the current uncertainty in the oil market, LINN Energy's future is becoming quite binary. If oil prices recover meaningfully, that should fuel a hefty rebound in the unit price. However, if oil remains weak for several years, the company's debt load might have to be restructured in bankruptcy, which is what investors fear the most.
