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Linn Energy Sees Its Borrowing Base Cut


Linn Energy’s borrowing base was reduced by a combined $750M to $4.5B.

This left the company with ~$790M in spare capacity as of 9/30/2015.

This may limit the pace of the bond buybacks.

Linn Energy’s bond prices are extremely distressed, though I think they are oversold.

Given its hedge book, Linn Energy has until the end of 2016 get things in order.

Linn Energy (NASDAQ:LINE) (NASDAQ:LNCO) has clearly seen better days. The stock has fallen 90% over the past year, as low oil and gas prices take their toll. Though, the most recent major price action came as a result of the company suspending its monthly distribution and instead focusing cash flows to buy its discount bonds.

While this strategy is good on paper, the lack of a yield has negatively impacted the unit price since it removed the primary rationale for most investors, namely income.

Borrowing base reduction - worse than estimated, but better than feared

Linn Energy has just announced the results of its biannual borrowing base redetermination. The company had the size of its credit facility reduced to $3.60B, down $450M from the $4.05B base in April.

While Berry Petroleum, Linn Energy's wholly owned subsidiary, had its credit facility reduced to $900M, down $250M from the $1.20B base in April. Do note that this includes the $250M of restricted cash that was posted by Linn Energy due to Berry technically exceeding its borrowing base earlier this year.

This means that Linn Energy saw its combined borrowing base decline by $750M to $4.5B. In addition, the company had ~$3.71B in debt and ~$790M of undrawn capacity left as of September 30, 2015.

Keep in mind that Linn Energy had previously estimated that its borrowing base would be reduced by only $500M, leaving it with just over $1.0B in spare capacity. It is likely that the sharp fall in oil prices during Q3 2015 played a part in this estimate being off the mark. However, some of the more bearish estimates I have read claimed that borrowing bases...