What: Shares of Linn Energy (NASDAQOTH:LINEQ) and its holding company LinnCo (UNKNOWN:LNCO.DL) are down 18% and 14%, respectively, so far today. This is the third trading day in a row in which shares have lost at least 10% during the trading day, and shares are down more than 45% since it reported earnings back on July 30.
So what: So much of what is going on now is still a bit of a hangover from its rather surprising announcement during the company's earnings release that it was recommending to the board that it suspend its distribution indefinitely. Major institutional investors and certain index funds that held Linn because it was a dividend-paying stock are now forced to sell their holdings since Linn no longer meets their criteria. As these investors wind down these positions en masse, it's causing a whole lot of pain.
Also, many research firms have started to downgrade their recommendations on Linn and LinnCo following this most recent announcement. Today's downgrade is brought to you by the research firm at RBC Capital Markets, which appears to have added fuel to the fire.
Now what: As much as these past couple of days have devastated units of Linn Energy, the long-term thesis on this company hasn't really changed that much. Instead, more and more people are becoming aware of the risks involved in a highly leveraged company that generates its revenue from volatile commodity prices.
Linn is becoming very much a binary-outcome stock that is dependent on an oil and gas recovery, and it appears that research firms are becoming more and more doubtful that price relief will come soon enough. By cutting its distribution while it still has some hedges in place to protect prices, it should be able to pare down some of its debt over the next couple of quarters. This should help, but it's not a panacea for the company's woes. The real test is when much of that hedging protection rolls off in 2016/2017. If oil and gas prices don't post a reasonable recovery from today's prices, then Linn could be in trouble.
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