So will the company survive?
Back in February, 2016, management of BreitBurn Energy Partners (NASDAQ:BBEP) issued a very hopeful press release. Both EBITDA and cash flow had increased from the third quarter, a rare achievement in the industry considering that commodity prices had continued to decrease. Furthermore, the company did have a significant hedging program to help minimize the impact of the continuing price decreases and provide some needed liquidity. Operationally, the company appeared headed in the right direction. Management had also previously promised that there were plenty of cheap rework projects with high IRR''s and operational improvements on the way. Finally, the company had about $1.2 billion of bank debt outstanding with a credit line of $1.8 billion. So the average 20% decrease in credit lines that were seen so far still left considerable liquidity for the company after an "average" credit line redetermination.
But right there is a major strategic mistake. Despite the talk of quality long lived assets, and a decrease in production of "only" 9% in the current fiscal year along with cheerleader's talk about production improvements (etc.....), clearly the banks did not believe all that management talk. Bankers are notoriously nervous at the times when companies need the money the most and something clearly happened to increase that nervousness lately. Limited partnerships in particular, tend to be leveraged and keep a small amount of cash on hand, a very bad combination at the bottom of the market. Even though the company paraded the fact that it had reduced its bank debt by a billion and had "only" $1.2 billion left, clearly that amount left on the credit line was far too much in a very hostile lending environment. Since the company is more leveraged, management needed far more reliable debt sources than a bank.
Notice that the company has no trouble so far from its unsecured debt because that unsecured debt is not bank debt. It should be noted that the unsecured debt is far more likely to receive nothing in a reorganization than the secured debt and so one would expect that unsecured debt to be far more nervous. But that debt nervousness is reflected in the price of the bonds, not in the pressure on management to repay the principal. That is a very significant difference.
Since the company had about $600 million in unused credit and much of the industry has seen a decrease in the credit line of an average of 20%, this company appeared likely to survive the credit line redetermination in good shape. Plus any reasonable management would stay in contact with its lenders in an industry situation such as this. So there has been a material change in the attitude of the lenders since that February press release, and the credit line decrease is probably more than $600 million despite the talk of quality assets and operational improvements. What has not been made public (and that is normal) is the subject of the negotiations and how far apart the parties are. That would help the average investor to evaluate his investment. However, it is very long odds that the common units will be worth anything six months from now.
There is one quirk that needs to be noted before the discussion goes further. Back in February 24, 2016, the company declared distributions for the preferred units, and the payment was to be made on April 15. That payment was still made. On April 14, the company announced a deferral of the interest payment on some of its debt as well as a suspension of any further preferred dividend payments of any kind. However, a deferral of an interest payment on debt but a payment of a preferred dividend may create its own problems.
A few years back ATP Oil and Gas filed bankruptcy. That particular bankruptcy led to a liquidation and the company is now gone. However, before the bankruptcy filing the company declared a preferred dividend which was paid about one month before the bankruptcy filing. This has led the court to allow the formation of a separate task force to look at possibly trying to recover some of those preferred dividends for certain classes of unsecured shareholders. Having personally seen some of the letters that the trustee has sent out in a preliminary attempt to collect those preferred dividends before receiving a court judgment, it is clear that the preferred shareholders of ATP have a very real possibility of having to refund one or more payments (currently the trustee is asking the court for the refund of three payments).
BreitBurn Energy partners may be headed into the same situation, as the company has retained counsel and is negotiating with the secured lenders, but it is still paying the preferred holders in April. That leaves a very real possibility of a similar attempt later for unsecured creditors to try and collect the dividend. Really all that needs to happen here is a reasonably soon bankruptcy filing and the preferred shareholders would likely see some court action, unsuccessful or successful. Since the company has hired advisors, then there is ample warning for the preferred shareholders.
Any time management does something that is irregular, off the beaten path, or just plain not expected, it should be a warning to any investor of any securities in the company. Something is definitely amiss here and investors would therefore be encouraged to watch from the sidelines rather than gamble on the outcome. Maybe this will work out, but why that preferred payment was continued when there is a very likely possibility that the company will file for reorganization and has deferred an interest payment is a real mystery. After all, any bond has a higher or superior claim than the preferred stock. At the very least the preferred holders are liable to see some court action and that court action could come or continue for years after the payment.
In summary, the chances of any equity holders receiving anything of value for their units or shares is probably well under 10% at this point and decreasing rapidly. Similarly, the chances of the unsecured bonds being worth anything are also pretty dim. A couple of things are alarming here, such as why the credit line decrease is far more than average, and a possible future fight over preferred dividends. But both of those issues should warn investors to stay away. Management has obviously been caught by surprise, and unless or until that surprise is dealt with, there is really no future here at all for the average investor. Despite the low prices of the securities, they can go to zero and afford profits to the very experienced investors of this specialty situation. A possible increase in value probably has the same chance as a lottery ticket at this point. Companies that engage advisors and start negotiations, rarely survive.
I have written articles about a group of low cost producers such as Advantage Oil and Gas (NYSE:AAV), Birchcliff Energy LTD., (OTCPK:BIREF), Murphy Oil (NYSE:MUR), and many others. A balanced basket of these companies should prove far more rewarding than an investment in this partnership at this time.
Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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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