(Reuters) – A U.S. judge rejected Breitburn Energy Partners LP’s (BBEPQ.PK) bankruptcy exit plan on Friday, dealing a blow to a bid by investors led by Elliott Management Corp and WL Ross & Co to acquire choice oil and gas reserves in West Texas.
Elliott and WL Ross, founded by U.S. Commerce Secretary Wilbur Ross, were set to acquire Breitburn’s Permian reserves through their participation in a $775 million rights offering that formed a key part of the company’s reorganization plan.
In a 68-page written ruling, U.S. Bankruptcy Judge Stuart Bernstein in New York said the plan of reorganization unfairly discriminates against a group of retail bondholders, who were set to recover only pennies on the dollar.
It is rare for courts to reject large Chapter 11 reorganization plans.
Breitburn filed for bankruptcy in May 2016. The ruling, which follows an unsolicited $1.8 billion cash offer by Lime Rock Resources that was rejected by Breitburn, will send the parties back to the negotiating table.
Breitburn’s plan to restructure $3 billion of debt had been opposed by retail bondholders and a group of equity holders, which argued that Breitburn had ignored potential bids and instead developed a plan that undervalued the company to favor select creditors.
They said those creditors stood to reap a windfall if the company exited bankruptcy under their control.
Breitburn owns prized oil reserves in the Texas Permian Basin as well as in California, the Rocky Mountains, the U.S. Midwest and Southeast. It was one of dozens of energy producers that filed for bankruptcy after a lingering slump in commodity prices that began in late 2014.
But as commodity prices have recovered from lows, the plan’s opponents said the company’s reserves had increased in value and justified a greater recovery for creditors and equity holders.
Bernstein rejected the valuation proposed by equity holders and said they were hopelessly “out of the money.”
Shareholders normally lose their investment in a bankruptcy, but the Breitburn case is particularly painful for equity investors. The company is structured as a master limited partnership, which treats canceled debt as taxable income, meaning shareholders could be stuck with a tax charge.
Breitburn Chief Executive Halbert Washburn testified during a four-day trial in Manhattan that the reorganization plan was the only one that came with guaranteed financing, thanks to the rights issue.
“This is the only plan we felt could get the company out of bankruptcy,” Washburn said.