Investors in upstream shale oil and natural gas companies have gotten used to bad news over the last two years. Tailspinning commodity prices have essentially destroyed their business models, with huge asset writedowns and crashing revenues dragging share and unit prices down. Though oil prices have rebounded and edged back up to $50/barrel, the bounce has come too late for some companies.
A new low was reached earlier this month when former shale oil and gas darling Linn Energy, LLC (LINE) threw in the towel, and filed a voluntary petition for a Chapter 11 bankruptcy, something I called a concerning precedent in the sector at the time. Linn Energy is by far not the only company in the energy sector that is standing with its back to the wall; Vanguard Natural Resources, LLC (NYSE:VNR), which also suspended preferred stock dividends earlier this year in an effort to conserve cash, and Breitburn Energy Partners LP (BBEP) are two other companies that are feeling the full force of the energy price collapse.
Unfortunately for unitholders of Breitburn Energy Partners, the company also decided last week that it was in its best interest to throw in the towel. The embattled upstream company said that it filed for Chapter 11 bankruptcy, and received debtor-in-possession financing to keep its business going for the time being:
Breitburn Energy Partners LP (Breitburn) today announced that it and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (Chapter 11 Cases). Breitburn expects to continue its operations without interruption, and cash from its operations, cash on hand, and a $75 million debtor-in-possession financing facility (DIP Financing Facility) will provide Breitburn with more than adequate liquidity to fund its operations during the restructuring process. Breitburn's DIP Financing Facility lenders have offered to arrange an additional $75 million of DIP financing at Breitburn's request. [via BusinessWire]
Stay Away From The Units
Lenders have shown a willingness to hand crucial financial lifelines to struggling energy companies, but investors should nonetheless stay away from companies that have filed for a Chapter 11 bankruptcy, for obvious reasons. At current energy price levels, drilling is still not profitable for most energy companies, and the debt burden for Breitburn Energy Partners is crushing. In absence of a major balance sheet restructuring, which could for instance come in the form of a debt-to-equity swap, the future for unitholders looks dim. Even if Breitburn Energy Partners manages to negotiate a debt restructuring with lenders, common unitholders are last in line to collect a paycheck. In fact, debt-to-equity swap yes or no, unitholders are likely going to be wiped out completely in the process, which is why I peg the odds of an equity recovery at less than 5 percent. In addition, Breitburn Energy Partners' unit are now selling on the OTC market, making them highly speculative securities.
Breitburn Energy Partners is the second large upstream company that filed for Chapter 11 bankruptcy, just days after Linn Energy filed a petition with the bankruptcy court. Whether Breitburn Energy Partners will succeed in restructuring its balance sheet or not is written in the stars. Nobody knows at this point whether Breitburn Energy Partners (or Linn Energy for that matter) will manage to repair their balance sheets and reduce their unsustainable debt levels. In any case, the reward-to-risk ratios in both cases are highly unfavorable for investors. Linn Energy's and Breitburn Energy Partners' units are likely going to be kicked around in the coming days/weeks by daytraders that are trying to make a quick buck, but the equity values are likely going to be zero. Investors should stay away.
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