When I read the press release announcing Breitburn Energy Partners' (BBEP) Chapter 11 Bankruptcy filing, I could hardly believe it. Sure, Breitburn was on the edge. It had deferred interest payments on two of its senior notes back in April, which I noted at the time likely meant a restructuring was in the works. But, I was expecting the lender group to give Breitburn some concessions.
Why did Breitburn go Bankrupt?
Breitburn had a major liquidity crisis heading into 2016. The company had not had its borrowing base reviewed since late 2014 due to the terms of a prior capital raise.
As oil prices declined, many of its peers saw their borrowing bases reduced considerably. Yet, Breitburn's borrowing base was priced as if oil were still in the $90 per bbl range, not in the $40s. As a result, a big cut was coming.
I assumed that Breitburn would face at least two 15% reductions, reducing the base by $500 million to $1.3 billion. Though, it turns out that the borrowing base would be cut even more. Breitburn and its lender group agreed to a short-term fix, setting the borrowing base at $1.4 billion in April, a $400 million cut. Though, this was not enough as the two sides apparently could not come to an agreement towards the size of the borrowing base cut, hence the bankruptcy filing.
Why did the lenders not budge?
It is hard to say what changed to make so many banks push these firms into restructuring. Though, my guess is that the secured lenders, meaning those that are behind the credit facilities, are pulling the plug on the weaker names in the sector.
2015 was a time when lenders were willing to work things out. Given how fast oil prices deteriorated, most of the highly indebted companies in the sector needed covenant relief almost immediately. Breitburn was one of the first to seek a bailout, getting a large cash infusion from private equity firm EIG. This bought it some valuable time, though clearly not enough.
It now appears that lender across the energy space are tightening the noose. The culling has only started. From Linn Energy (LINE) to Sandridge Energy (NYSE:SD) and now Breitburn, the banks (secured debt) are now looking out for themselves and letting those lower on the totem pole (the equity and unsecured noteholders) get wiped out.
Breitburn was a painful lesson for me as an investor. I was only in the stock since Breitburn took over the old QR Energy "QRE" in late 2014. But, there were red flags telling investors that all was not alright which I should have listened to.
QRE was bought when oil prices were high and soon after the merger was completed Breitburn started having trouble. The company was unable to complete a $400 million Senior Note offering in October 2014 due to limited investor demand, a highly unusual event. A few months later, Breitburn was desperately looking for loan, which eventually led to the EIG investment at very poor terms.
Nevertheless, I am still rather shocked at how quickly the situation deteriorated for Breitburn at the end of the day. As noted above, it seems that the secured lenders want to push the weaker energy firms into bankruptcy and let the boom or bust cycle play out.
Needless to say, I think Breitburn equity has no value. Actually, it has negative value if debt is restructured and cancellation of debt income is incurred. I have sold my entire position in Breitburn.
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