Overall Outlook lowered to Negative and this was interesting: The pain ain't over yet.
The SGL-3 Speculative Grade Liquidity Rating reflects LINE's adequate liquidity profile through 2016. Supporting LINE's liquidity profile is an expectation of free cash flow through 2016, with a high level of hedged production and management focus on debt reduction. However, LINE's alternative liquidity is declining, with borrowing base reductions expected on its revolving credit facilities in the upcoming October 2015 borrowing base redetermination and the need for debt reduction in order to have sufficient EBITDA/Interest covenant compliance of at least 2.5x through 2016.
Look at all the over-leveraged E&Ps - then consider their suppliers who are likely overleveraged, too. QE and ZIRP are like cancer, they spread. When money is plentiful, people borrow it. I'm guessing not only the E&P suppliers are overleveraged, but the E&P employees are as well. Not going to end well at all.
This is at an interesting price. Normally, I would have expected volume to diminish upon such a plummet, but in fact volume is increasing. That said, against higher volume, LINE is not busting through 3.26 today. So...given that there are no realistic positive SHORT TERM catalysts that can be identified outside of the best-guess price of oil, let's ponder what new negative catalysts would be, not necessarily in this order and what the likelihood is, that is, it's priced in:
1. Reserve revaluation in October - very likely and maybe priced in
2. Credit lines tightening - hard to say
3. Executive management fleeing (but some might say that's good) - likely
4. Slower production - likely if wells don't get completed on time
So of all those negative catalysts, how much of it is reflected in the price? That's the real question for the next couple of months. Beyond that, oil prices become important.
The problem isn't the price of oil. The problem is their debt. This management team has learned nothing.
LINE can't buy back all that debt and continue drilling enough new high-decline wells to continue generating revenues needed for cash flow.
Oil could go to 100 tomorrow and there would still be a dozen or more E&Ps with strong balance sheets and paying divvies, while LINE stays under $5.
You could have bought XOM on a true over reaction drop, a company still buying back shares, still sporting a divvy, still holding refining assets, still with a fortress balance sheet. Or if you want just a Permian, Bakken player with a divvy and little debt you could have bought OXY. And you bought LINE?
At their current buy back rate they can retire their debt in 8 years. Is that really what you want an oil comany doing with its cash flow??
Sentiment: Strong Sell