The bankruptcy case for Breitburn Energy Partners LP (OTCPK:BBEPQ) seems like it will never end. The exclusive period to file a plan was extended again (docket 1453) to September 12 during a hearing held on July 19. This contrasts with many other bankrupt energy companies that have already emerged from Chapter 11. The various stakeholders of Breitburn have not been able to agree on a reorganization plan because of the volatility in commodity prices, and major hedge funds are battling over the new Breitburn Energy equity.
Yet Another Extension
Going into the recent hearing, the exclusive period extension sought by Breitburn was for August 31, but Judge Stuart Bernstein agreed to an even further extension to September 12 to file a plan and November 13 to solicit ballots for acceptance. This would mean the earliest Breitburn would exit bankruptcy is in December, which would be a long 19 months after filing for Chapter 11. The problem is the swings in oil and natural gas prices. These large price swings impact the plan value used as a basis to determine recoveries for various creditor claim classes.
The PV10 for reserves that was contained in a confidential document that was released to the public on May 25 is indicative of how modest 10% price movements in strip pricing for WTI oil and Henry Hub natural gas impact valuation of assets. (The table below was created by totaling the data contained in the document for specific regions). Current WTI prices are more than 10% lower than the 12/28/16 figures.
PV10 in $ million
|Region||12/28/2016||Plus 10%||Minus 10%|
|Eastern Midland Basin||1,030.00||1,325.90||737|
|Greater Postle Field||254.7||317||193.2|
|Greater Jay Field||174.9||256||103|
12/28/16 WTI strip pricing 2017-21: $56.35, $56.60, $56.04, $55.86, $55.96
12/28/16 HH strip pricing 2017-21: $3.70, $3.14, $2.87, $2.88, $2.90
Official Equity Committee
Unlike SunEdison, Inc. (OTCPK:SUNEQ), which did not get an official equity committee appointed and shareholders had to pay for their own lawyers, there is an official equity committee for Breitburn. The equity committee at this point is trying to get discovery on the detailed financial figures and asset valuations from Breitburn under Bankruptcy Rule 2004. The committee is asserting that it should not have to wait until after a plan is negotiated by creditors and should get the figures while it is being negotiated. It noted that management is using these figures now for negotiating a management incentive plan. Therefore, so should equityholders have the same right to get these values now.
The equity committee is also trying to get a “market test” order issued by the court. Instead of using plan values estimated by competing Breitburn stakeholders, bids for assets would be used. Under LaSalle, a 1999 Supreme Court decision, the court ruled that using bids was easier for bankruptcy courts to compare competing reorganization plans than just estimated plan values. A “market test” is not an automatic right, and bankruptcy judges are allowed to use their own discretion before issuing a market test order. Currently, not only do the plan values keep changing with the energy prices, but so do the components within the various proposed plans.
Competing Creditor Committees
In a May 30 filing (docket 1311), the Ad Hoc Group of Bondholders (I will refer to this group by their lead law firm, White & Case) stated they “are near completion”. It is now the near the end of July, and the interested parties are further apart than two months ago.
The White & Case group, which holds about 14% of the unsecured notes, had what it thought was a superior plan than the proposal by the 2lien holders. Under its plan, it would raise $1.0 billion via a rights offer and use some of the raised cash to pay 2lien holders their $650 million claim. That plan used a $2.1 billion enterprise value, and the rights would have a stock purchase price of a 16% discount. (So far, these terms seemed fair.) However, 35% of the rights would have been reserved just for backstop participants, plus the backstop participants could also participate in the other 65%. In addition, the backstop participants would be paid a fee of 8% of the $1.19 billion “Buy-In Equity” ($95.2 million) payable in new BBEP stock. In other words, retail unsecured noteholders and other non-backstop participants would get a recovery much lower than the White & Case group, assuming favorable trading for the new BBEP stock. This disparity often happens when raising new capital under reorganization plans.
Fast forward a few weeks. Energy prices dropped and White & Case group’s expected paper profits were gone. It had to change its proposal. As stated by Ray Schrock, a lawyer representing Breitburn, “Simply put, this revised term sheet was a material departure from the terms the Debtors had previously negotiated with the Official Committee of Unsecured Creditors and the ad hoc group of bondholders represented by White & Case LLP.” (docket 1439)
Now it seems that the original Breitburn reorganization plan put forward by the 2liens is competitive to the new undisclosed White & Case plan. Under this plan, 2liens would get new equity for their $650 million claim. In addition, they would arrange for new financing with 1liens. (1liens are already being paid $450 million cash from the proceeds from the hedge termination.) (docket 1451) EIG Global Energy Partners, which would be getting $487.5 million of the new stock under the 2lien’s plan, would effectively control the new Breitburn Energy.
To make things more complicated, there is different unsecured noteholder group, which has retained the Akin Group as its lawyer. Collectively, this group owns over 34% of the unsecured notes and is negotiating its own undisclosed plan proposal. It neither filed a motion to support nor to object to the extension. It did, however, reserve the right to object (docket 1301).
Second Lien Group (docket 79)
EIG Management $487.5 million 2liens
Anchorage Capital $122.8
Guggenheim Partners $48.8
Official Committee of Unsecured Creditors (docket 1450)
Beach Point Capital $87 million unsecured notes
Wexford Spectrum $42.2
Ad Hoc Unsecured Noteholder Group (Akin Group) (docket 1452)
Elliott Management $230.9 million unsecured notes and $54.2 million RBL
Fir Tree $25.7
Marathon Asset $91.8
WL Ross & Co $84.9
Ares Management $99.2
(Note: Ares moved from the official unsecured committee to this group)
Ad Hoc Group of Bondholders/Unsecured Noteholders (White & Case)
14% of unsecured notes
No verified statement filed yet.
Voting On A Plan
The Akin Group owns 34% of the unsecured notes, which is enough to defeat a plan from White & Case. (You need ⅔ of the dollar amount and a majority of holders within a class for that class to accept the plan.) Unless another class of creditors, such as 2liens, votes to accepts the White & Case plan. The 2liens have already stated their opposition to the White & Case plan. The Akin Group would need additional support from unsecured noteholders to get any plan that it proposes accepted by the unsecured claim class. With only 14% of the unsecured notes, White & Case alone could not defeat an Akin Group plan.
It gets a little more complicated. If the 2liens are paid cash for their entire claim, they are not considered impaired and cannot vote. The final plan may be that the 2liens get new equity for their entire $650 million claim and, therefore, they are entitled to vote. The 2liens vote for that plan. Since all you need is for one class to accept the plan, the court could confirm it. End of story.
This bankruptcy case should have been a “done deal” months ago. In the end, the original proposal for 2liens to get equity could be the final plan, but it is impossible to predict given the various factors impacting a final plan.
Investors holding BBEPQ units are not getting any recovery under any plan under consideration, but will most likely get a tax liability – cancellation of debt income, or CODI. The BBEPQ units are a Sell. While I own a modest amount of the unsecured notes, I cannot make a recommendation because of the lack of detailed information about possible plans being created by the various groups of creditors.
Disclosure: I am/we are long BBEPQ NOTES.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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