The emergence of Breitburn Energy Partners LP from Chapter 11 reorganization is a sign that energy companies are rebounding after oil prices reached a bottom in 2014, falling below $30 a barrel.
Breitburn lowered its debt level massively through its restructuring to $105 million and began operating as Maverick Natural Resources on April 6. The company is now majority-owned and controlled by funds and accounts managed by EIG Global Energy Partners, a Washington, D.C.-based firm focused on private investments in energy companies and projects in the oil and gas, midstream, infrastructure, power and renewables sectors.
Halbert Washburn was named as CEO of Maverick, which also has roughly $295 million of additional borrowing capacity under a new bank credit facility.
After oil prices dropped drastically to $30 a barrel from over $100 in 2014, Breitburn encountered many obstacles, including its $2.96 billion debt balance, and filed for bankruptcy two years later.
The Los Angeles-based oil producer faced the same fate as many over-leveraged energy companies who had relied too much on higher crude oil prices to bail them out of extremely high debt loads of several billion dollars. The low oil prices hit the energy industry hard as more than 100 companies succumbed and were forced to file for bankruptcy and as creditors received only a small fraction of their investment.
The turnaround of Breitburn, which produces long-lived oil and gas reserves in the Midwest, Ark-La-Tex, Rockies, California, Permian Basin, Southeast and the Midcontinent regions, is an indicator that the energy industry is making a comeback in other regions than the Permian, said Patrick Morris, CEO of New York-based HAGIN Investment Management.
“This is a sign that things are improving dramatically,” he said. “It is an indication of better times in the energy industry.”
California is a very tight oil market and more expensive for oil producers, but the companies were the third largest producers of petroleum in 2016. California has historically had few operators and the current landscape is dominated by Chevron Corp. (NYSE: CVX), California Resources Corp. (NYSE: CRC), Aera Energy, a joint venture of Royal Dutch Shell Plc (NYSE: RDS.A) and ExxonMobil Corp. (NYSE: XOM), and Sentinel Peak Resources LLC.
With Breitburn now back in the field after filing for bankruptcy protection in May 2016, the addition of another player is good for the valuations of oil fields since the wave of bankruptcies had depressed assets “substantially which were trading at substantially below the price per flowing barrel,” Morris said.
“It’s good to have another independent operator in California because it producers a healthier ecosystem,” he said. “Getting competition back means more companies are available to bid on assets again.”
Haynes and Boone has played a key role in a number of high-profile E&P and oilfield service matters such as Chapter 11 cases and tracked 144 North American oil and gas producers that have filed for bankruptcy since 2015. These bankruptcies involve about $90.2 billion in cumulative secured and unsecured debt.
The trend has not abated even as oil prices have steadily rebounded. As of March 31, six producers filed bankruptcy, representing roughly $7.5 billion in debt, according to Haynes and Boone.
“The number of E&P bankruptcy filings has continued to drop off as most financially distressed producers have restructured their debt, either through the bankruptcy process or outside of bankruptcy,” said Buddy Clark, an energy practice co-chair at Haynes and Boone. “The magnitude of some recent producer filings show that the increase in oil prices since 2016 has not been enough for some larger independents to pull out of the financial death spiral caused by the oil price collapse that started in late 2014.”
Breitburn encountered many hurdles during its two-year Chapter 11 bankruptcy reorganization. In a rare move in March, U.S. Bankruptcy Judge Stuart Bernstein rejected the company’s plan to divide into two separate creditor-owned companies. He said some of the terms of the plan discriminated against retail bondholders. The bondholders were opposed to the plan and voted against it.
Before seeking court approval, companies usually reach consensus with its creditors. The equity holders were also against the reorganization plan because owners of MLPs pay large amounts in taxes since the business structure considers canceled debt as taxable income.
In 2017, unsecured creditors and equity investors opposed the plan and sought an open auction for the company’s Permian assets to seek market value.