Talk about closing the barn door after all the investors have left.
That’s what Citi Research oil and gas analyst Faisel Khan did Friday when he downgraded Linn Energy (LINE) and its sister firm LinnCo (LNCO) to Sell. The stocks are trading at 38 cents and 17 cents respectively on Friday. The company announced last week it is exploring “strategic alternatives related to its capital structure,” considered code language for likely bankruptcy.
“What is this, stomping on the grave?” tweeted Kevin Kaiser, energy analyst with Hedgeye Risk Management, a research boutique (Kaiser was recently profiled in Barron’s).
So what did Khan and team add in their report? Some more details about how the path to a bankruptcy filing might go. They write:
We believe the company will likely file for Chapter 11 after the next round of borrowing base redetermination and/or post a covenant breach. Linn’s borrowing base will likely be cut in the spring redetermination due to significantly lower commodity prices than the last redetermination completed in Oct. In addition, hedging gains through Oct 2016 will be excluded from the borrowing base calculation. The next borrowing base redetermination is scheduled for April.
They note Linn’s hedges, protecting cash flows against the steep declines in oil, are starting to roll off. Cash flows could turn negative next year.
They warn recoveries in bankruptcy for unsecured bondholders are likely to be low:
Based on current transactions we see in the market and including $1.9 Bil in hedges as well as cash on the balance sheet, we believe that the recovery factor on Linn’s unsecured credit will be low. This is reflected in the company’s bond prices that are trading at pennies to a dollar.
Finally, a rare sighting in a research report — a table at the end lists “expected share price return: -100%.”