Don't Cross The 'LINE'...Time To Avoid MLPs?

The unrelenting storm of sagging oil prices is all set to take another casualty in to its fold in the form of Linn Energy LLC LINE, which on Thursday said it is exploring strategic alternatives to strengthen its balance sheet and maximize the value of the company.

But, the commodity pricing pressure and loads of debt would mean there is little value left for shareholders. Houston, Texas-based Linn recently exhausted its credit facility by drawing down the remaining $919 million, and now its total borrowing stands at $3.6 billion.

No wonder the shares plunged 61 percent on Friday to touch a new 52-week low of 47 cents a share. Shares of the company plummeted more than 90 percent over the last year, while oil prices have dropped only 35 percent in the same period.

Analysts, who were having some hopes on the company's turnaround until Thursday, have thrown in the towel. Stifel downgraded LINE stock to "sell" from "hold," saying it sees limited value potential in the current commodity environment.

Related Link: Bernstein Warns Of 1980s-Style Sovereign Debt Crisis Amid Oil Market Slump

Analyst Brian Brungardt, Jr., said: "While we previously viewed the partnership as being able to work through at least 2016 given the hedges in place and associated strong positive free cash flow, we see a growing likelihood the partnership may pursue the reorganization route."

In a regulatory filing, the company has revealed its board changed the severance plan which expanded the class of participants and added a provision regarding parachute payments under the change of control plan.

"In light of hiring a financial advisor, maxing out the credit facility, and amending its change of control package, we view the partnership as increasingly pursuing the route of reorganization or sale of the partnership," according to Brungardt, who now says the stock is worth $0.

LinnCo Also Cut

Stifel also cut LinnCo LLC LNCO to "sell" from "hold,"citing that LinnCo only owns units of LINE.

As of now, the only possibility for Linn Energy is to file for bankruptcy, the analysts wrote. If the company adopts that path, it may abandon the Master Limited Partnership (MLP) format and convert to a C-Corp with the remaining assets.

If Linn files for bankruptcy, it could shake up the upstream MLP industry and investors need to keep a tab on companies such as Vanguard Natural Resources and Williams Partners as these firms have a similar structure.

If Linn goes down, it may also take the Street's hopes for the MLP space down with it.

Posted In: StifelAnalyst ColorNewsShort IdeasDowngradesCommoditiesMarketsAnalyst RatingsMoversTrading Ideas

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