This Is What Fueled the Devastating 50% July Plunge of LINN Energy LLC and LinnCo LLC

When income stocks stop producing income it’s not a pretty sight. Just ask LINN Energy LLC and LinnCo LLC.

Matthew DiLallo
Matthew DiLallo
Aug 4, 2015 at 5:31PM
Energy, Materials, and Utilities

What: July was an absolutely devastating month for investors in LINN Energy LLC (NASDAQOTH:LINEQ) and LinnCo LLC (UNKNOWN:LNCO.DL) as both were off more than 50% for the month. Fueling the sell-off was LINN Energy's decision to suspend its distribution -- and therefore LinnCo's dividend -- so it can conserve cash. But with no more income on the horizon, it left the company's income-seeking investors with no reason to hold, leading to a massive sell-off.

So what: To say LINN Energy's decision to suspend its distribution is a surprise would be the understatement of the year. It was a shocking turn of events that has many investors worried about the company's ability to make it out of this downturn without going bankrupt. Those bankruptcy worries are even more evident in the bond market as LINN's bonds are trading at a steep discount.

LINN Energy is actually taking advantage of that discount to buy back its bonds from investors, which is one reason why it wants to conserve cash. Recently, the company bought back $599 million in bonds for just $392 million in cash, which is a 35% discount to par value. That brings its bond buyback up to $783 million year to date. Additional debt repurchases could be on the way as the dividend suspension will increase the company's retained cash flow by $450 million on an annualized basis, which it can then plow back into additional debt repurchases.

Now what: From a practical standpoint suspending the distribution makes a lot of sense because LINN can use the cash to buy back more bonds at a discount. That being said, the company has completely lost the respect of investors, who were counting on the company's supposedly well-protected cash flow to generate income for their retirement portfolios. That lost credibility might never be recaptured, even if the company is able to stave off a potential bankruptcy and make it through the downturn in one piece.