Breitburn Energy Partners LP will ask a U.S. court on Thursday to approve its Chapter 11 bankruptcy exit plan over fierce objections from shareholders who say the oil-and-gas producer’s valuation is “indefensibly low” given an upswing in oil prices.
The stakes are high for the equity holders, who could be stuck with a combined tax liability of $525 million in addition to losing their investment. Breitburn is structured as a “master limited partnership” which provides tax advantages when the company is profitable. But investors in such companies can lose more than 100 percent of their investment if the company does not make a profit.
Los Angeles-based Breitburn filed for Chapter 11 protection in 2016 after oil prices had slumped to below $30 a barrel from more than $100 in 2014, triggering a wave of bankruptcies across the energy industry.
Oil futures have rebounded since then. In recent weeks they have traded above $60 per barrel, hitting a three-year high.
Breitburn says its reorganization plan, which envisions splitting its oil-and-gas assets into two new companies, will slash its debt and position it to withstand swings in commodity prices. Two creditor groups will own the new companies.
Creditors holding more than $3 billion in claims support the plan. Breitburn’s investment banker Lazard Freres & Co estimated the company’s enterprise value, which includes debt and equity, at about $1.6 billion.
An official equity committee estimates the company is worth $3.8 billion, a valuation that would ensure some recovery on their investment and eliminate the tax charge.
However, Breitburn has said in court papers that equity holders are “woefully out of the money” and about $1.5 billion shy of break-even.
Under the plan, unsecured creditors led by Elliott Management Corp and WL Ross & Co would own choice Permian Basin assets in Texas through a company formed through a $775 million rights offering. Unsecured creditors with $793 million of debt would own a second company with oil reserves in California, the Rocky Mountains, the U.S. Midwest and U.S. Southeast.
Retail bond holders would receive pennies on the dollar.
The case is before Judge Stuart Bernstein of the U.S. Bankruptcy Court in New York.