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All Linn

15 March 2016 By Kevin Allison

Linn Energy’s investors are nearing the end of a slippery slope. The U.S. oil and gas partnership warned that bankruptcy may be “unavoidable” as it skipped $60 million interest payments due on Tuesday. It’s a dramatic reversal from a few years ago, when the now-penny stock was worth more than $10 billion, spent billions buying rivals and paid fat dividends.

Houston-based Linn was once the biggest of a handful of oil and gas drillers that organized themselves as master limited partnerships – known as MLPs – or similar structures. The tax-advantaged partnership form, originally pioneered by steadier-earning pipeline owners, allows companies to avoid paying tax on income, so long as they pass nearly all of their cash flow through to shareholders.

Fat and growing dividends, fed by a steady stream of debt-fuelled acquisitions, made the sector a favorite of yield-starved investors during the boom years. Emboldened by high crude prices, some upstream producers also went the partnership route, despite being more exposed to cyclical commodity swings than their pipeline peers.

Linn was bolder than most. In 2012, it bought some natural gas fields from BP for $2 billion. A year later it splashed out $4.3 billion for California- and Texas-focused Berry Petroleum. In June 2014, just as oil prices started to fall, it spent another $2.3 billion to buy gas wells from Devon Energy, increasing its exposure to another troubled commodity.

The debt-dependent business model that drew investors to the stock while crude prices were high turned poisonous as oil crashed. In early 2015, stung by the plunge in crude prices and saddled with over $10 billion of net debt, Linn cut its annual shareholder distributions by nearly 60 percent – obliterating the main reason for investors to own the stock. Six months later, it nixed the payout completely.

Even before Linn confirmed it wouldn’t make payments on some of its $9 billion of debt, its shares had fallen more than 95 percent from their 2014 highs – a painful lesson in the dangers of mixing financial engineering designed for steady streams of revenue with a cyclical commodity business.

 

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