To provide themselves a cushion against sharp drops in oil prices, drilling companies often buy hedges—financial contracts that pay off when prices fall. Now a quirk of bankruptcy law has stripped some shale drillers of that insurance just when they need it most. Houston-based Linn Energy, for example, bought contracts that guaranteed a price of $90 a barrel, even if prices were lower. It paid off: By the end of March, with oil below $45 a barrel, Linn’s hedges were worth $1.5 billion, making them among the company’s most valuable assets. The hedges weren’t enough, however, to keep Linn out of financial trouble after the oil price plunge. This put Linn’s lenders, a syndicate of more than 20 companies, in an odd position. Linn owed them $4 billion and was about to go into bankruptcy. Yet some of those same lenders—it’s not clear which ones—were also on the other […]