(Reuters) - Linn Energy LLC LINE.O said on Tuesday that bankruptcy may be unavoidable as the oil-and-gas producer missed interest payments amid a slump in oil prices.
The company, which operates in California, Wyoming and North Dakota shale fields, said there was substantial doubt about its ability to continue as a “going concern” after it decided to skip interest payments due on Tuesday.
It said it has a grace period of 30 days to make interest payments totaling around $60 million.
“We are continuing to work with our advisors to review a full range of strategic alternatives to reduce the company’s overall debt,” Linn Chief Executive Mark Ellis said in a statement.
With around $10 billion in debt, Linn would be the largest U.S. oil company to seek bankruptcy protection in the current energy rout.
About 40 oil and gas producers across the globe have filed for bankruptcy since oil prices began to decline in late 2014, and up to a third of all energy companies may fail unless prices recover, consulting firm Deloitte said last month.
Linn was designed as a high yield energy investment vehicle, which received beneficial tax treatment in return for paying out the bulk of its profits as distributions to its unitholders.
Because of this structure, the company took on significant debt to grow through acquisitions. Since 2006, the company has done 62 deals for a total of around $17 billion to build its asset base.
“The writing has been on the wall for quite a while now,” said Kevin Kaiser, an analyst at research firm Hedgeye. Kaiser recommended in 2013 that investors short Linn.
“The company took on way too much debt, primarily in an effort to make distributions to its equity holders that it could never afford.”
Linn Energy was founded in 2003 and had its initial public offering in 2006.
The company is structured similarly to a master limited partnership (MLP), relying on steady income to pay distributions to equity holders. Most MLPs are pipeline and storage companies, but a handful are exploration and production companies.
Linn was a pioneer among the current wave of exploration and production MLPs and at one point had a market capitalization of more than $10 billion. Its current market capitalization is less than $250 million.
Because of its unusual corporate structure, Linn’s unitholders could be left with a significant tax burden in the event of a bankruptcy.
Unitholders have always had to pay their share of Linn’s taxable income, even if they do not receive cash distributions from the company. Cancellation of debt in a restructuring would be treated as taxable income under U.S. tax law.
The company halted distributions to unitholders in October.
Linn also said it is currently in default of its credit facility because its auditors could not sign off on its financial statements without noting their doubts about the company’s ability to continue.
The company also reported a fourth-quarter loss of $7.05 per unit as it booked impairment charges of $3 billion.
The company forecast 2016 average production of 980-1,070 million cubic feet equivalent per day, nearly 14 percent lower than its 2015 production. It said it plans to shut in around 1,000 wells this year.
Several U.S. oil and gas producers, hurt by the prolonged slump in crude prices, have filed for bankruptcy protection after delaying interest payments.
Oil-focused Energy XXI Ltd EXXI.O, which has operations in South Louisiana and the Gulf of Mexico, also said on Tuesday it was delaying paying interest on one of its unit's bonds as it continues to work with advisers to slash debt.
Energy XXI, which owed about $2.8 billion as of mid-February, said in a filing this month that it may file for bankruptcy if oil prices remain low. The company owed around $3.6 billion at the end of the year but was able to buy back some debt.
Linn shares closed down 30 cents at 68 cents a share, while Energy XXI shares were down 5 cents at 65 cents.
Reporting by Michael Erman in New York, Additional reporting by Tom Hals in Wilmington and Manish Parashar in Bengaluru; Editing by Saumyadeb Chakrabarty and David Gregorio
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