May 1 looms large for executives at troubled L.A. oil firm Breitburn Energy Partners.
That’s the day Breitburn’s creditor bankers are supposed to reassess how much the company can borrow. And if they cut Breitburn’s borrowing capacity below the $1.2 billion that it has already drawn from its $1.8 billion credit facility, then May Day truly could turn disastrous.
Breitburn executives have already tried to limit the damage. On March 28, they convinced their banker creditors to delay the redetermination for a month to May 1, and in exchange, volunteered to lower their borrowing limit to $1.4 billion.
Breitburn Chief Executive Hal Washburn told Wall Street analysts during the most recent quarterly earnings conference call in February that he did not expect the creditor banks to lower the debt much further.
“Although our lenders have the discretion to redetermine our borrowing base below the level of our current outstanding borrowings, we do not expect that to occur,” he said. He noted that Breitburn’s interest coverage ratio (earnings before taxes divided by interest expense) was above the 2.5-to-1 ratio required in the credit facility covenants.
If its borrowing base is cut below the $1.2 billion the company has borrowed against its credit facility, Breitburn would be in technical default.
Breitburn is hardly alone: Borrowing base redeterminations have been frequent and often brutal at companies in the oil patch over the past year as oil prices have cratered. But Breitburn has so far been shielded from the worst effects of the price collapse thanks to an extensive price hedging portfolio – 77 percent of its oil this year is locked in at a price of $85 a barrel, more than twice the current price. Those hedges will begin rolling off in earnest next year, leaving Breitburn much more exposed to the market. That’s a major reason why this particular redetermination of the company’s borrowing base is so crucial.
Breitburn has made several cost-cutting moves. Among them was eliminating dividends, a move that sent shares plunging 20 percent. It also got rid of more than 50 positions and slashed capital spending more than 60 percent over the past year.
Nonetheless, the borrowing base redetermination has hung over Breitburn for months, primarily because of Breitburn’s heavy debt load. Breitburn incurred nearly $2 billion in debt to purchase a Houston oil partnership in July 2014, two months before oil prices began their historic collapse. That debt is held by a consortium of banks. Breitburn’s total debt load (long term debt plus current liabilities) at the end of last year was more than $3 billion.
Ten days ago, Breitburn announced it was eliminating dividend payouts for its preferred shareholders and that it was skipping interest payments totaling $46 million as it was in negotiations to restructure its debt.
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