Oil May Burn Investors

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Breitburn Energy Partners’ Chapter 11 reorganization plan would offer no payout for shareholders, who might even be stuck with large tax bills as the company works to relieve $3 billion in debt.

The details of the plan were revealed in a May 5 court filing by the downtown oil and gas drilling partnership in which it sought an extension to July 11 for the submission of a final proposal so that it could try to reach a deal with creditors.

The restructuring could set up a legal showdown before Judge Stuart Bernstein of the U.S. Bankruptcy Court for the Southern District of New York, who last year took the unusual step of allowing the formation of an equity committee of shareholders. Bernstein is set to consider the extension request at a June 1 hearing.

Breitburn filed for bankruptcy protection in May of last year after failing to reach a deal for a cash infusion from creditors. The company was hit hard by the 2014-15 collapse in oil prices, which came months after it bought another company for $2 billion, almost entirely financed with debt.

The reorganization plan includes the conversion of $1.2 billion in unsecured notes to new equity and an additional infusion of $1 billion in new equity. It contains no reference to a payout for shareholders, who have watched the value of their shares plunge to an all-time low of 4 cents as of May 17. In its quarterly earnings filing on May 10, Breitburn stated it is likely that shareholders will not receive any distribution on account of their holdings.

In its quarterly filing, the company reported $152 million in first-quarter revenue compared with $148 million for the same period last year and a net loss of $88 million versus a $104 million loss.

The warning that shareholders would likely see all their shares completely wiped out was not unexpected, but the news has left them upset, especially since Breitburn Chief Executive Hal Washburn and three other top executives have together been granted nearly $19.2 million in payouts since the bankruptcy filing.

Furthermore, because of the company’s partnership structure, any debt that is cancelled during bankruptcy proceedings is treated as taxable income for shareholders, so they could be on the hook for as much as $100,000 each.

One shareholder and former employee, Karl Rydjord, wrote in a March letter to Bernstein that employees had compensation tied to the stock.

“At this point, it appears that the management is not only wanting to steal the company from the shareholders, but also trying to steal the compensation they paid to employees by wiping out the common shares,” he said.

Attorneys at Weil Gotshal & Manges, a New York law firm representing Breitburn in the bankruptcy proceedings, and attorneys at the New York office of Proskauer Rose, which is representing the equity committee, did not return calls seeking comment.

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