The situation for upstream companies has taken a dramatic turn for the worse this year. Linn Energy, LLC (LINE) is desperately trying to avert default, and the oil and natural gas producer achieved a rare victory two weeks ago when the company informed its unitholders that it made certain interest payments on its senior notes, and entered into an agreement with its lenders to amend its credit facility. The deal is buying Linn Energy time to hammer out a larger debt deal with its creditors.
Linn Energy is far from being the only upstream company that is being thrown to the wolves right now. Chesapeake Energy Corp. (NYSE:CHK) has suspended common unit distributions, and even distributions on its outstanding convertible preferred stock in January in a last ditch effort to conserve cash. Chesapeake Energy also reported successful creditor negotiations lately, which yielded the reaffirmation of its $4.0 billion borrowing base (at the cost of posting additional collateral) and beneficial credit facility amendments. In this context, read also my article written in response to Chesapeake Energy's gained covenant relief titled "Chesapeake Energy Scores Big Win To Avoid Bankruptcy."
Vanguard Natural Resources, LLC (NYSE:VNR)? Same story. Management announced the suspension of common and preferred unit distributions when the company reported underwhelming fourth quarter results at the beginning of March.
A lot of upstream companies have been brought to its knees by the energy price crisis, and BreitBurn Energy Partners LP (BBEP) is only the latest company that made a rather horrifying statement lately. In April, BreitBurn Energy Partners informed unitholders (and creditors) that it "has elected to suspend the declaration of any further distributions" on its 8.25% Series A preferred units and its 8.00% Series B preferred units. Sound familiar? But that was not where the bad news stopped: BreitBurn Energy's management has further decided to not make contractual interest payments on its 7.875% senior notes (maturity April 2022) and on its 8.625% senior notes (maturity October 2020). Total due interest that was NOT paid, but deferred: $46.7 million, which is quite a chunk of change.
Not paying due interest comes with an airbag, though: Companies have grace periods during which they can make outstanding interest payments, thereby curing the 'default'. If, at the end of the grace period, BreitBurn Energy Partners has not paid up, the company really is 'in default', which usually gives creditors the right to demand accelerated repayment of principal.
As a result, BreitBurn Energy Partners will have to work out a deal with its creditors quickly, and make up on its interest payments within 30 days (the grace period), during which the company can heal the 'default'. BreitBurn Energy Partners will likely follow the same path as Linn Energy and Chesapeake Energy and try to negotiate short-term concessions from its lenders to win time to work out a balance sheet restructuring. Any beneficial amendment to its credit agreements would be a positive catalyst for BreitBurn Energy's units.
Whether BreitBurn Energy will sink or swim will largely depend on the leniency of its creditors/banks. The good thing is, that, as we have seen in the cases of Chesapeake Energy and Linn Energy, lenders are prepared to make concessions and give energy companies a little more time to work out a deal. That being said, though, the default probability remains as high as in Linn Energy's case. BreitBurn Energy Partners is nothing but a spec at this point. Stay away.
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