Please ensure Javascript is enabled for purposes of website accessibility

Is LINN Energy LLC's Latest Debt Deal Enough?

By Matthew DiLallo - Nov 16, 2015 at 11:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

LINN Energy LLC and LinnCo extinguish $1 billion in debt, but $9 billion remains.

Oil prices have remained a lot weaker for a lot longer than most oil companies had ever expected. This persistent weakness is causing a lot of uncertainty, which is forcing weaker oil companies like LINN Energy (LINEQ) and affiliate LinnCo (NASDAQ: LNCO) to take action to address their issues before it's too late. We saw that last week when the companies exchanged $2 billion of debt in a deal that reduced both interest expenses and outstanding debt. While it's a big step forward, it might not be the last debt reduction initiative taken on by the company.

Details on the debt deal
Under the terms of this latest debt transaction, LINN Energy is exchanging $2 billion worth of its unsecured notes for $1 billion of new second lien notes. In a sense, the exchange wipes $1 billion in debt from its balance sheet. That said, it does come at a high price, with LINN Energy's new notes coming with a 12% interest rate. That's well above the 8.625% rate of the highest-yielding notes that were part of the exchange. However, even with that higher rate, the company will decrease its annualized interest expense by $16 million.

Overall, LINN Energy is exchanging portions of five tranches of its notes for these new second lien notes, which are due in 2020. Here's what the exchange looks like:

Unsecured Notes Exchanged

Par Value of

Principal Amount
of Second Lien

6.50% senior notes due May 2019



6.25% senior notes due November 2019



8.625% senior notes due April 2020



7.75% senior notes due February 2021



6.50% senior notes due September 2021






Data source: LINN Energy LLC. Dollars in millions.

The exchange provides three important benefits to LINN and LinnCo:

  • It reduces the total leverage by $1 billion.
  • It reduces annual interest expenses by $16 million.
  • It reduces the nearest debt maturity in 2019 by $1.4 billion.

What's next for LINN Energy?
With this latest exchange, LINN Energy has now repurchased or exchanged nearly $2.8 billion of its senior notes for $557 million in cash and another $1 billion of new notes. That's a $1.8 billion net reduction of debt. Furthermore, it has reduced its cash interest expenses by $70 million annually. That said, the company still has $9 billion in debt that would need to be addressed if oil remains at its current level for a few more years.

However, what's most important to note here is the fact that the $9 billion number isn't the biggest concern for LINN and LinnCo. Instead, the types of outstanding debt are what need to be addressed. Here's a look at its pro forma debt structure:

Type of Debt

 Amount Outstanding

Credit Facilities

 $3.5 Billion

Term Loan

 $500 Million

Senior Notes

 $4 Billion

Second Lien Notes

 $1 Billion

Data source: LINN Energy LLC.

The biggest issues are the credit facilities and term loan, which started the year with $5.9 billion of total combined borrowing capacity. However, for the second time this year, the borrowing base was redetermined by LINN Energy's banks with this latest redetermination resulting in another reduction in the combined borrowing base, this time down to $4.7 billion. That leaves the company with just $790 million in liquidity for the next six months, at which time LINN's banks will engage in another redetermination. The implication here is that this spare capacity could again be chipped away in the spring if oil prices remain weak. 

The worst-case scenario here would be for LINN's borrowing base to be redetermined below its outstanding borrowings. Such a result would force the company to scramble for cash to pay back the difference. So, in order to avoid such a scenario LINN needs to "do something" to address its credit facility before next spring. The good news here is that the company does have a range of options including selling non-core, limited production assets such as its Northern Louisiana or Mid-Continent development plays, acquiring a financially stronger company, or seeking out a cash infusion from private equity.

Investor takeaway
LINN Energy and LinnCo are making clear progress on balance sheet improvements. That said, more work needs to be done, especially to reduce the amount borrowed on the credit facilities. The good news is LINN has both the time and options to address this problem. The bad news is that investors can expect this stock to be very volatile until either oil prices vastly improve or it's back on sound financial footing. Because of this, LINN Energy's future continues to remain very binary, with substantial upside if prices improve but an outside chance of going under if prices remain weak and it doesn't address its debt issues in time. 


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Linn Energy, LLC Stock Quote
Linn Energy, LLC

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.