S&P Downgrades LINN Energy (LINE) to 'CCC'; Notes Liquidity Concerns

Standard & Poor's Ratings Services lowered its corporate credit rating on Houston-based oil and gas exploration and production (E&P) company Linn Energy LLC to 'CCC' from 'B+'. We also lowered our corporate credit rating on Berry Petroleum Co. LLC to 'CCC' from 'B+'. The outlook is negative.

We also lowered our issue-level rating on Linn Energy's second-lien debt to 'CCC-' from 'B' and placed it on CreditWatch with negative implications. We also lowered the unsecured debt rating to 'CC' from 'B-'. The recovery ratings remain '5' and '6', respectively. The recovery rating of '5' indicates our expectation of modest recovery (10% to 30%, higher half of range) in the event of a payment default. The '6' recovery rating indicates our expectation of negligible (0%-10%) recovery in the event of a payment default.

At the same time, we lowered the issue-level rating on subsidiary Berry Petroleum Co.'s senior unsecured notes to 'CCC-' from 'B' and placed them on CreditWatch with negative implications. The recovery rating remains '5', indicating our expectation of modest recovery (10% to 30%, lower half of range) in the event of a payment default.

"The downgrade reflects our view that Linn Energy may not have enough liquidity to address borrowing-base reductions in 2016," said Standard & Poor's credit analyst Michael Tsai.

As a result, we have revised our assessment of liquidity to less than adequate from adequate, despite our projections for positive cash flows stemming from the company's favorable hedges for the year. In addition, Linn has engaged Lazard as an advisor and fully drawn down on its credit facility, which in our view increases the risk the company could compel creditors into negotiations if crude oil and natural gas prices continue to remain depressed. The result could be a debt restructuring that we would consider distressed rather than opportunistic, given our current view on the company's liquidity challenges.

Our ratings on Linn Energy reflect the company's fair business risk profile, highly leveraged financial risk profile, and less-than-adequate liquidity.

The negative outlook reflects the potential to lower ratings over the next 12 months if Linn fails to resolve potential overdraws on Linn Energy and Berry Petroleum's credit facilities, which could occur given lower natural gas and crude oil price bank decks and a declining hedge book. Additionally, given its declining liquidity, we believe Linn could seek to further restructure its debt to lower cash interest costs, which we would likely view as a distressed exchange.

We could raise the rating if Linn Energy was able maintain adequate liquidity through the borrowing-base redeterminations and not engage in a distressed transaction.

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