Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: LINN Energy LLC (NASDAQOTH:LINEQ) surprised the market by announcing that it was issuing at least $181 million in equity. It plans to use the cash to pay down its credit facility after using that facility to buy back its bonds on the open market. Investors didn't seem too thrilled with the idea, as they dumped units sending them down more than 10% in early morning trading.
So what: The reason this move caught investors off guard was due to the fact that just last month LINN's CEO Mark Ellis said that, "swapping debt-for-equity is not something we're looking [to do] at this point". That comment came after an analyst on the company's first-quarter conference call asked if the company was thinking about de-levering. While what LINN is doing is not a straight debt-for-equity swap like we've seen recently from Halcon Resources (NYSE:HK) and SandRidge Energy (UNKNOWN:SD.DL) as they issued shares directly to an existing bondholder in exchange for debt, LINN is effectively doing the same thing as it is swapping its equity to extinguish debt.
What has investors concerned is the fact that Ellis said that LINN was comfortable with its liquidity saying that, "we're really not in the position where liquidity is a big issue for us." Instead, he said that the company would only consider de-levering by issuing equity to make an acquisition.
Now what: The fact that LINN is now issuing equity to reduce its debt is concerning because it just said that it wouldn't go this route. This suggest that either the company couldn't pass up on the opportunity to buy back its debt on the open market, or it has now grown worried about its balance sheet. Either way, the sudden change of course didn't sit well with investors who are selling out today.