Two More US Energy Companies Go Bankrupt: Breitburn, Sandridge File Chapter 11

Just days after the latest two shale casualties filed for bankruptcy protection when both Linn Energy and Penn Virginia announced prepackaged Chapter 11, moments ago Sandridge announced it too was entering bankruptcy court when it filed a voluntarily petition under Chapter 11 in U.S. Bankruptcy Court for Southern District of Texas to consummate a pre-arranged reorganization.

This follows just hours after Breitburn Energy Partners announced it had filed Chapter 11 as it hopes to negotiate a restructuring of its balance sheet in court, continuing talks with creditors that began a month ago, CEO Hal Washburn said in a release.

Combined the two filings would push the total YTD defaulted bond tally higher by another $7.4 billion, as a result of $4 billion in Sandridge debt and $3.4 billion for Breitburn. According to a Reuters tally, some 28 publicly traded North American oil and gas producers have sought bankruptcy protection since early 2015

As the WSJ writes, Breitburn's decision to file for bankruptcy was made when it became "abundantly clear that those negotiations could not be concluded and an appropriate restructuring consummated on an out-of-court basis" in time to avert a cascade of defaults that would have squeezed Breitburn’s liquidity, James Jackson, chief financial officer of a Breitburn subsidiary, wrote in a court filing.

About $3 billion of Breitburn’s debts are bank and bond debt, topped by $1.25 billion in loans from lenders led by Wells Fargo Bank, NA. Breitburn is carrying $650 million of senior secured second-lien bonds and $1.1 billion in unsecured bonds. Breitburn said it has been in talks with bondholders about a balance-sheet restructuring. The company has lined up $75 million in bankruptcy financing, and is in talks with senior lenders about bankruptcy emergence financing.

Breitburn’s hedging assets, contracts that cushion the company’s cash holdings against price volatility, will be a central factor in restructuring talks, according to the court papers. The company estimates proceeds of its hedging agreements could be up to $500 million. Outside bankruptcy, hedges are “a significant source of liquidity.”

In bankruptcy, however, a dispute is brewing with Breitburn’s senior lenders, many of whom are also counterparties to the hedge agreements. The company hopes negotiations will avoid litigation over the question of whether it is entitled to use the hedging proceeds, according to court papers. Meanwhile, Breitburn has come to terms with senior lenders on financing arrangements that will support normal operations in bankruptcy.

As the WSJ adds, the Los Angeles company joined a crowd of oil-and-gas firms in bankruptcy, including Linn Energy LLC, which also attracted investors with partnership tax benefits. In April, Breitburn suspended distributions to preferred investors and skipped bond interest payments. Distributions to common shareholders were cut, then suspended last year, as Breitburn took steps to get its finances in line with plunging oil prices.

Citing the “prolonged decline in commodity prices,” Mr. Washburn said Breitburn’s existing debt is unsustainable. In papers filed in the U.S. Bankruptcy Court in New York, Breitburn reported assets of $4.7 billion and debts of $3.4 billion as of March 31.

Shares of the energy exploration and production company have plummeted over the past year, as the price of oil sank and losses mounted. Breitburn’s estimated proven reserves, which were valued at $4.5 billion at the end of 2014, were worth only $1.3 billion as of the end of 2015.

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Today's other filer, Sandridge, listed total assets of $7.01 billion and total debt of $4 billion as of March 31 in a court filing. SandRidge, which has been in talks with creditors on a restructuring deal, said last Wednesday it would not be able to file financial results for the quarter ended March 31 on time.

As Bloomberg adds, Sandridge entered into an agreement with holders of ~98% in principal amount outstanding under reserve-based lending facility (RBL), 79% in principal amount of 2nd lien notes, 55% in principal amount senior unsecured notes. The agreement contemplates RBL facility and the equitization of ~$3.7b other funded indebtedness. Sandridge's pro forma capital structure will consist of $425m in 1st lien RBL debt (maturing in 2020), $300m in mandatorily convertible debt.

The company projects having “ample” liquidity to fund ongoing operations, capital programs throughout Chapter 11/upon emergence, without need for debtor-in-possession financing or other added capital.

In other words, both Breitburn and Sandridge plan on continuing operations under bankruptcy, as has largely been the case for all other recent chapter 11 defaults.

The full bankruptcy filings are shown below.

Sandridge:

 

And Breitburn's declaration of bankruptcy: