Is Linn Energy’s Situation So Dire?

The oil market has taken another beating in the past few days. Many speculate this recent plunge in prices could be related to the potential nuclear deal with Iran and the latest fears about China’s economic growth. In either way, oil company Linn Energy (LINE) has suffered from this turn of events and it’s currently trading below $9. Is the company’s situation so dire?

The highly levered suffer the most

It’s no surprise to see oil and gas produces’ stocks fall as the energy prices tank. The situation is even worse for producers that are highly levered, which is a good thing in times of growth in prices but not as much when oil prices take a dive.

Since October of last year the stock prices of many oil companies took a hit with Linn Energy right up there with over 70% plunge. I have tried to gather a few other mid-cap oil and gas companies that are mostly based in the U.S., examine the debt-to-equity of these companies in the past quarter, and the reaction of the market to news over the price of oil.

Obviously each oil producer has its own problems that impact its valuation — as Tolstoy pointed out “each unhappy family is unhappy in its own way”. So how dire is the current situation for Linn Energy?

When it comes to a potential bankruptcy, a possible outcome for Linn Energy, it could occur due to a cash flow problem or balance sheet debt imbalance.

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Disclaimer: The author holds a long position on Linn Energy. He does not plan to change his position within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.