On the same day that Linn Energy LLC announced it was searching for strategic partnerships to bolster its balance sheet, Standard & Poor's Ratings Service (S&P) downgraded the credit ratings for Linn and Berry Petroleum Co. -- which Linn purchased in 2013 -- over liquidity concerns.
Meanwhile, the stock price of the Houston-based independent plummeted Friday over fears that Linn could become the latest victim of global commodity prices and be pushed into bankruptcy.
On Thursday, Linn said it has "initiated a process to explore strategic alternatives to strengthen its balance sheet and maximize the value of the company." It later added that its directors "are in the process of evaluating strategic and financial alternatives to help provide the company with financial stability, but no assurance can be given as to the outcome or timing of this process."
But in an ominous sign, Linn revealed that the company had recently borrowed approximately $919 million from its credit facility for general corporate purposes. It was the last amount available to be withdrawn. Linn's total borrowings under the credit facility are now $3.6 billion. The company also announced it had retained Lazard, a global financial advisory and asset management firm, as its financial adviser.
"Given commodity pricing pressure and the impact that market challenges are expected to have on our industry and the long-term financial outlook of our company, we believe it is prudent to explore opportunities to strengthen our balance sheet and ensure we have adequate financial flexibility to manage through prolonged commodity price headwinds," said CEO Mark Ellis. "By proactively undertaking this process now with the help of our advisers, we believe we can implement a comprehensive solution that will position Linn for long-term success."
S&P lowered its corporate credit rating for both Linn and Berry from "B+" to "CCC" and issued a negative outlook on Thursday. The ratings service also lowered its issue-level rating for Linn's second-lien debt from "B" to "CCC-" and placed it on CreditWatch with negative implications. Linn's unsecured debt rating was also lowered, from "B-" to "CC."
"The downgrade reflects our view that Linn Energy may not have enough liquidity to address borrowing-base reductions in 2016," said S&P credit analyst Michael Tsai. S&P added that "as a result, we have revised our assessment of liquidity to less than adequate from adequate, despite our projections for positive cash flows stemming from the company's favorable hedges for the year.
"In addition, Linn has engaged Lazard as an advisor and fully drawn down on its credit facility, which in our view increases the risk the company could compel creditors into negotiations if crude oil and natural gas prices continue to remain depressed. The result could be a debt restructuring that we would consider distressed rather than opportunistic, given our current view on the company's liquidity challenges."
S&P also downgraded the issue-level rating for Berry's senior unsecured notes from "B" to "CCC-" and placed it on CreditWatch with negative implications.
"We could raise the rating if Linn Energy was able maintain adequate liquidity through the borrowing-base redeterminations and not engage in a distressed transaction," S&P said.
In late afternoon trading on Friday, shares of Linn on the NASDAQ exchange had fallen more than 58.2%, to 50 cents/share (minus 70 cents/share).
Linn reported a net loss of $1.57 billion (minus $4.47/unit) in 3Q2015, the most recent quarter where figures are available, due in large part to an impairment charge of about $2.26 billion (see Shale Daily, Nov. 18, 2015). The company cited a decline in commodity prices and its estimate of proved reserves for the impairment charge.
Linn purchased Berry Petroleum Co. for $4.9 billion in 2013 (see Shale Daily, Feb. 22, 2013). Following a redetermination that was completed last October, Linn's maximum borrowing availability under its credit facility was reduced to $3.6 billion, and Berry's was reduced to $900 million. Linn said Thursday that Berry's credit facility remains fully utilized at $900 million, including $250 million of restricted cash posted as collateral.