Image source: LINN Energy LLC.

Beleaguered upstream master limited partnership LINN Energy (LINEQ) reported fourth-quarter results before the market opened on Tuesday. Those results, however, were trumped by the company's update on its plans going forward, which were ominous. Here's a look at the good, the bad, and the ugly news from that report.

The good
There were three things in LINN Energy's fourth-quarter report that could be seen as good news. First, the company produced $223 million of free cash flow during the quarter, which provided it with a little bit of financial flexibility to address its financial woes. Second, it noted that it made tangible progress on debt reduction in 2015, with LINN's outstanding debt falling by $1.9 billion. That's a 17% reduction in total debt from the end of 2014.

Last, LINN Energy announced its 2016 capex plan, which will see the company spend $340 million. That only represents a 44% drop from last year, which is a much less severe cut than many other oil and gas companies are making. For example, Whiting Petroleum (WLL) is cutting its capex by a staggering 80% over what it spent last year. It's a reduction that implies severe financial stress with Whiting Petroleum basically wrapping up its fracking operations in the first half of the year because industry conditions and economics are so weak right now. LINN's cut, on the other hand, seems a bit less severe. 

The bad
While LINN Energy's spending cut isn't as harsh as that of many of its peers, the company still isn't spending enough money to maintain its production. In fact, it expects production to decline by 14% over last year's average, with some of that drop due to the company shutting in wells that aren't making any money in the current operating environment. Still, that's less of a fall than companies like Whiting Petroleum will see, which expects its production to fall by 18.5% in 2016 at the midpoint of its guidance.

The ugly
Where things turn ugly is when we take a look at LINN Energy's debt situation. Its auditors have substantial doubts that LINN Energy can continue as a going concern. That's because, based on current estimates and expectations for commodity prices, LINN doesn't expect to remain in compliance with all of the restrictive covenants contained in its credit facilities, unless those requirements are amended or waived.

Furthermore, it is currently undergoing a strategic review of its capital structure, and as part of that review, it has elected to exercise its 30-day grace period for interest payments that were due today. If it fails to make the payments within 30 days or obtains a waiver, it would be in default. That puts the company dangerously close to filing for bankruptcy.

Having said that, it is having discussions with its creditors in an effort to right-size its balance sheet. So, it is taking advantage of the grace period due to this review and not because the company is currently short on liquidity. However, a liquidity crunch could be on the horizon because its banks will redetermine its credit facility next month. That facility is currently maxed out at $3.6 billion after LINN Energy borrowed the remaining $919 million that was available to it and put that money in a separate account with a bank that's not one of its lenders. A redetermination below the amount it has currently borrowed could trigger an immediate payment of the overage. Also, as a result of receiving the going concern notice from its auditors, LINN Energy is currently in default under its credit facility.

To put it bluntly, LINN Energy basically has 30 days to come up with a solution to address its balance sheet or it could have to file for bankruptcy, which the company has noted might be unavoidable. Having said that, it is still hoping to avoid that fate by exploring a number of options, including potentially following an old blueprint from the last time upstream MLPs imploded during an oil market meltdown.

Investor takeaway
LINN Energy is clearly in dire straits right now. The company doesn't have much time to address its mountain of debt given the deadlines of the 30-day grace period and the April redetermination of its credit facility. Right now, survival outside of bankruptcy seems like a coin toss, with its only hope being very lenient creditors who are willing to either forgive a large swath of its debt or extend a financial lifeline. Neither seems likely, especially given that so many other oil and gas companies are under just as much, if not more, financial stress. Suffice it to say, it's not looking good for LINN Energy these days.