Source: LINN Energy LLC.
This past year has been brutal on leading upstream MLP LINN Energy (LINE +0.00%). That's largely because the company had taken on too much debt heading into the downturn, and didn't hedge enough of its production to cushion the blow from the commodity price collapse.
The company did, however, react quickly when conditions deteriorated, and made several smart moves this year. Here's a look back at some of its best moves during the past year.
The bold cut
LINN Energy started 2015 with a very bold move after it announced in early January that it was reducing both its oil and gas capital budget and its distribution by roughly 50% over the prior level. The plan was set so that the company could invest the capital required to maintain its current production level, while also providing a distribution at a level where both could be funded with internally generated cash flow. Further, the company's plan was expected to generate some excess cash flow that it would use to pay down debt.
LINN's distribution cut was praised by its peers, with Vanguard Natural Resources (NASDAQ: VNR) CFO Richard Robert telling the Wall Street Journal that LINN's cut was "doing something drastic now in order to fight another day." Further, Robert said that Vanguard Natural Resources might soon follow LINN's lead because that course of action might "ultimately be the prudent thing for us to do, at least you sleep better at night." It's a course of action that, after a month of likely sleepless nights, Vanguard Natural Resources took, slashing its own payout 44%.
Securing outside funding
In addition to reducing its cash outflows so that they could be funded internally, LINN secured outside capital to fund future growth. In July, the company finalized two strategic alliances with private equity funds. The first alliance was a $500 million five-year commitment with GSO Capital Partners to fund the drilling of wells within LINN's acreage.
The second alliance was with Quantum Energy Partners, which would provide LINN with $1 billion of equity to fund acquisitions. The key to both deals was that these private funding arrangements would enable LINN to grow its production and asset base without spending a lot of incremental capital.
Cashing in on the Permian
Also in July, LINN announced the sale of its remaining Permian Basin Wolfcamp position for $281 million. This marked the end of the company's portfolio transformation, whereby it sold or traded its high-decline Permian Basin properties for lower-decline properties in other basins. This sale, however, was for cash, which the company subsequently used to buy back some of its debt at a significant discount.
Exchanging away its debt
Speaking of debt buybacks, LINN Energy spent a great deal of time and effort in 2015 addressing its leverage. By November, the company had repurchased or exchanged $2.8 billion of its senior notes for $557 million in cash, and another $1 billion in new second-lien notes. That resulted in a $1.8 billion net reduction in debt, and cut its annualized interest expense by $70 million.
While the debt reduction was an important step forward, the company still has a lot of work to do. It has yet to address its credit facility, which could be a big problem in 2016 should its banks continue to reduce its borrowing base.
LINN's liquidity cushion has already fallen from $2.2 billion to start the year to just $790 million following its October redetermination. Another major reduction in its borrowing base this spring could force LINN to take drastic action, including major asset sales, or even the potential for bankruptcy if oil prices really crash.
Investor takeaway
Despite a tough year, LINN Energy made a number of smart moves. It cut its cash outflows, as well as its debt, which put it in a better position to weather the downturn. It also secured key funding for future growth.
The one move it has yet to make is to reduce the borrowings under its credit facility. That's the move it desperately needs to make in 2016, or it might not survive this downturn.
