BreitBurn Energy Partners (NASDAQ:BBEP) recently filed for restructuring under Chapter 11, which is an outcome that I've long considered quite likely due to its massive debt load. I was less certain about the timing of the filing though, as BreitBurn technically had the ability to make its April interest payments and continue with debt restructuring negotiations. However, BreitBurn indicated in its filing that it concluded that the "revenue and cash flow generating capacity is not sufficient to service their outstanding debt on a long-term basis" and that it needed to preserve enough liquidity to see itself through the Chapter 11 process. BreitBurn also secured $75 million in DIP financing and has arranged for an additional $75 million in DIP financing to be available if needed.
Status Of The Common And Preferred Units
I believe the chances of the common units seeing any recovery is quite remote. At this point in time, the common units are behind the DIP financing, the first-lien credit facility, the second-lien notes, the unsecured notes, and the preferred units in terms of position in BreitBurn's credit structure. Linn Energy's recent filing involved a restructuring agreement where the common equity would be wiped out. Compared to Linn, BreitBurn has a slightly higher amount of secured debt relative to the estimated value of the company, which further decreases the chance of the common units seeing a recovery.
Similarly, I believe the preferred units are unlikely to see a recovery as well. There is too much debt ahead of the preferred units in the capital structure, and the unsecureds are trading for 8 or 9 cents on the dollar, indicating a belief that the unsecureds are severely impaired. If the unsecureds are severely impaired, then the preferred units will likely see nothing.
Unanswered CODI Questions
Also looming over the common units is the potential for significant amounts of cancellation-of-debt income to be passed through to unitholders. I previously thought that BreitBurn may attempt to postpone a Chapter 11 filing until it could figure out a solution to the CODI issue. Instead, BreitBurn has filed for Chapter 11 and has not mentioned any particular solution (if any) yet. The CODI issue makes owning the common units particularly risky in the long run. The tax bill resulting from CODI could easily result in a loss many times greater than the remaining $0.05 value of BreitBurn's common units.
Notes About The Balance Sheet
Although BreitBurn lists $4.7 billion in assets versus $3.4 billion in liabilities on its balance sheet, the asset figure is not truly representative of what BreitBurn's assets are worth right now. BreitBurn uses the successful efforts method of accounting, which results in significantly smaller impairments compared to the full-cost method of accounting, and thus results in the balance sheet value of oil and gas properties being much higher than market value.
BreitBurn's properties are listed on its Q1 2016 balance sheet as being worth $3.86 billion, while its hedges are valued at $0.57 billion. The combined total is $4.43 billion. Common sense would indicate that its borrowing base wouldn't be threatened with a reduction below $1.2 billion if its hedges and properties were actually worth anywhere close to $4.43 billion. Instead, its properties are probably worth closer to $1.5 billion using a reasonably generous valuation, which would change the balance sheet equation to roughly $2.3 billion in assets versus $3.4 billion in liabilities. For comparison, the PV-10 of BreitBurn's reserves was $1.28 billion at the end of 2015 based on roughly $50 oil and $2.60 natural gas.
The Unsecured Bonds
BreitBurn's Chapter 11 filing indicated that the unsecured debtors are likely to see some return, although with the bonds trading at 8 to 9 cents on the dollar, the expected recovery is pretty low. Without hedges and using 2016's projected exit rate of 17 million BOE per year results in an estimate of $240 million EBITDA at $60 oil and $3.25 natural gas. BreitBurn's secured debt (including the DIP facility) is around 8x that $240 million number. If the hedges are monetized for $400 to $500 million and used to pay down the secured debt, this would reduce the secured debt to around 6x EBITDA at $60 oil and $3.25 natural gas. While I think the unsecured bonds will see some recovery, the level of recovery is probably going to be pretty marginal unless oil prices improve further. The current bond prices appear reasonable given the likely level of recovery, while $60+ oil could result in more substantial recoveries.
BreitBurn's Chapter 11 filing is another indication that one should always look at the underlying business without hedges to see if it is sustainable in the long run. BreitBurn's future breakeven point was at approximately $75 oil and $4 natural gas before preferred or common distributions, making $50 or $60 oil a poor situation for it. As well, BreitBurn's net debt after monetizing hedges is around 7x EBITDA at $75 oil and $4 natural gas, meaning that even with a substantial oil and gas recovery, the preferred units and common units probably won't see a recovery. Increases in the oil price during the restructuring process may increase the recovery for the unsecured bonds though.
As well, another takeaway is that balance sheet numbers often do not reflect the market value of oil and gas properties, especially for companies using the successful efforts method of accounting. I think some investors had a false sense of security with BreitBurn showing positive balance sheet equity. The unsecured bond prices were a strong sign that BreitBurn actually had significantly negative equity with the properties valued at market prices though.
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