In June 2013, Linn Energy (LINE) CEO Mark Ellis purchased 10,000 shares of the company on the open market, when the stock was trading for $30. Three years later, the Texas-based oil and gas company said via a regulatory filing that filing for Chapter 11 protection "may be unavoidable" and there could be tax consequences for its investors.
What went wrong?
In December 2013, Linn Energy acquired Berry Petroleum for $4.3 billion, through a mix of cash, equity, and the assumption of Berry Petroleum's debt. The deal was announced in February 2013 and Ellis purchased shares soon thereafter. It was a purchase Jim Cramer characterized as "ill-advised" as Linn Energy lacked the cash flows to justify the acquisition.
Tuesday, the company released its fourth-quarter earnings and 2016 guidance, and the shares plummeted more than 30% to close at $0.65. If Linn's closing price stays below $1 for 30 consecutive days, it will receive a delisting notice from Nasdaq and will have 180 days to correct itself.
Before the market open, Linn reported a net loss of $2.5 billion in the fourth quarter, which amounts to $7.05 per unit (Linn is organized as a master limited partnership, its shareholders are known as unitholders). The company also recorded a non-cash impairment of $3 billion for the quarter and $5.8 billion for the year due to lower commodity prices and a change in the company's estimates in proved reserves.
Perhaps more telling than the losses was a disclosure in the company's audited financial statements about its ability to continue as a going concern. The inclusion of going-concern qualification means that Linn is currently in default under its Linn credit facility. Also not helping matters, the company also elected to defer making interest payments totaling $60 million on several of its notes.
Unless Linn is able to obtain a waiver or other relief from its lenders within 30 days, payments on the company's outstanding debt could be accelerated. If that were to occur, then Linn would be in default under its senior and second lien notes, similarly triggering an immediate demand for payment.
And, because financial misery loves company, a default in the second lien notes would trigger a default under the Berry credit facility.
If accelerated debt payments and fears of filing for Chapter 11 protection weren't worrying enough for investors, Linn also stated that its unitholders could face adverse tax consequences if its actions to shore up the balance sheet result in cancellation of debt income.
"We urge our unitholders to consult their tax advisors regarding the potential adverse effects of the various strategic alternatives that may be available to us," the company said in the filing.
After Tuesday's announcements, unitholders may also want to consult their doctor.