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Thursday, October 22, 2020

Linn Energy LLC (OTCMKTS:LINEQ) Shorts Feel the Burn

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Linn Energy LLC (OTCMKTS:LINEQ) is a very similar story to another company we recently profiled, Breitburn Energy Partners LP. Both are upstream MLPs in the energy patch that were granted too much access to very easy debt when oil prices were up at $105/bbl and projected to rise, and WTI crude oil futures were carrying their highest ever net long speculator interest, which gives a very good sense of sentiment in that market at that time. OPEC was considered to be in full control of the market. That turned out to be a very faulty premise. And it was a deadly one for holders of LINEQ stock.

They were forced into Chapter 11 protection in May of this year, and have mostly waited for cancellation of shares. Until recently, that is. With word that Breitburn was pressured by the SEC to form an equity committee and assign some value to shares, LINEQ stock is trading in sympathy due to strong similarities, and has begun to squeeze out shorts like a tube of toothpaste. However, this action comes remarkably following a filing with the bankruptcy court on Oct 7 representing a material definitive agreement with the stipulation that “All existing equity interests of the Company will be extinguished without recovery”. Nonetheless, the chart shows 96% during the following week in terms of shareholder gains in the stock. Moreover, the company has registered increased average transaction volume recently, with the past month seeing a bit less than 290% beyond what we have been seeing over the larger time frame.

Linn Energy LLC (OTCMKTS:LINEQ) bills itself as an independent oil and natural gas company that acquires and develops oil and natural gas properties in the United States. Its properties are located in the Hugoton Basin, the Rockies, California, east Texas and north Louisiana, the Mid-Continent, Michigan/Illinois, the Permian Basin, and south Texas.

As of December 31, 2015, the company had proved reserves of 4,488 billion cubic feet equivalent; and operated 19,294 gross productive wells. Linn Energy, LLC was founded in 2003 and is headquartered in Houston, Texas. On May 11, 2016, Linn Energy, LLC, along with its affiliates, filed a voluntary petition for reorganization under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas.

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A recent twist in this case was the Company’s August offer to exchange each outstanding unit of LINN Energy, LLC for one LinnCo share upon the terms and conditions of the Prospectus/Offer to Exchange dated April 26, 2016 , and the accompanying Amended and Restated Letter of Transmittal.

The subsequent offering period for the Exchange Offer expired at 12:00 midnight on Monday, August 1, 2016. American Stock Transfer & Trust Company, the exchange agent for the Exchange Offer, advised LinnCo that a total of 19,954,774 LINN units were validly tendered during the subsequent offering period and an aggregate of 123,909,317 LINN units , representing approximately 35% of LINN’s issued and outstanding units, were validly tendered and not validly withdrawn pursuant to the Exchange Offer and have been accepted by LinnCo for exchange. LinnCo has promptly issued new LinnCo shares for all such tendered LINN units in accordance with the terms of the Exchange Offer. LinnCo now owns approximately 71% of LINN’s issued and outstanding units.

The purpose of the Exchange Offer was to permit holders of LINN units to maintain their economic interest in LINN through LinnCo, an entity that is taxed as a corporation rather than a partnership, which may allow LINN unitholders to avoid future allocations of taxable income and loss, including cancellation of debt income , that could result from future debt restructurings or other strategic transactions by LINN.

In general, CODI will be allocated to persons who are deemed to hold the LINN units when the events giving rise to such CODI occur. The filing of the Bankruptcy Petitions under Chapter 11 of the Bankruptcy Code did not itself cause LINN to recognize CODI; however, it is likely that the final resolution of a bankruptcy plan would cause LINN to recognize an amount of CODI, which may be substantial.

Earning a current market cap value of $36.1M, LINEQ is undergoing the twists and turns of a Chapter 11 restructuring where total assets claimed by the company amount to over $7.5 bln against standing referenced debt over $7.67 bln. The company has done a complicated exchange offering and entered into a material definitive restructuring support agreement, but the SEC’s position around CODI obligations seems to be creating a window through which shorts are being shoved in painful fashion. Our advice is to be cognizant of the better part of valor on this one. We will take another look at it as events transpire. For continuing coverage on $LINEQ stock and our other hot stock picks, sign up for our free newsletter today and get our next hot stock pick!

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