Linn Energy says Chapter 11 looming

HOUSTON — Linn Energy said Tuesday it had defaulted on the terms of a $3.6 billion credit agreement, and executives warned that breach could lead to it a Chapter 11 filing.

Linn said it had defaulted on the credit facility after its auditor KPMG concluded there is a substantial risk the Houston-based producer couldn’t continue operating. Linn also announced it would delay making about $60 million in interest payments on other debt due March 15.

The agreements come with a grace period, but once that’s over, creditors will have the option to demand payment in full. If they choose to do so, those defaults could trigger defaults on other loans. The end result could be a cascading series of defaults that could force Linn to file for Chapter 11 protection, the company warned.

“If lenders, and subsequently noteholders, accelerate our outstanding indebtedness, it will become immediately due and payable and we will not have sufficient liquidity to repay those amounts,” Linn Energy wrote in a filing with the U.S. Securities and Exchange commission. “We could be required to immediately file for protection under Chapter 11 of the U.S. Bankruptcy Code.”

Linn Energy is one of the few oil producers structured as a master limited partnership. The company is designed to pay out much of its cash flow to investors while protecting itself from swings in oil prices through a deep book of oil hedges. But more than a year of low prices have eviscerated the company’s finances, left it burdened by debt and unable to regain revenue by locking in the high prices it had previously benefited from in the past.

In October 2015, Linn Energy suspended the dividend it paid to investors to preserve cash.

Revenues in the fourth quarter fell to $647 million compared to $2.2 billion in the fourth quarter of 2014. Over the same period, production has fallen by 16 percent to to 1.1 billion equivalent cubic feet per day, compared to 1.358 billion equivalent cubit feet per day fourth quarter of 2014. The company’s bottom line in the fourth quarter 2015 was a net loss of approximately $2.5 billion, which includes non-cash charges of approximately $3.0 billion.

Linn Energy announced it would shut in about 1,000 marginal wells in 2016, totaling about 50 million cubic feet per day.

Given the low commodity price environment, the Company is implementing a strategy for marginal well shut-ins. LINN anticipates this marginal well shut-in program will impact 2016 production by approximately 50 MMcfe/d. The Company expects to have approximately 1,000 wells shut-in as a result of this strategy.

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