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Shareholders May Have Say in Oil Bankruptcy

When a public company files for bankruptcy protection, investors usually get wiped out.

Shareholders of bankrupt downtown oil company Breitburn Energy Partners, however, might have the rare chance to recoup some of their investment.

Judge Stuart Bernstein of the U.S. Bankruptcy Court for the Southern District of New York took the highly unusual step on Oct. 14 of approving the creation of an equity committee to give shareholders a voice at the negotiating table in the disposition of assets.

“When equity committees form, it’s common that some distribution will be made to equity holders at the end of the day, though it may be a modest or even token distribution,” said Robert Rasmussen, a professor specializing in corporate reorganization with USC’s Gould School of Law.

Shares of the troubled oil producer immediately jumped 60 percent to 40 cents on this first sign of hope for investors after more than a year of gloom. The share price peaked at 49 cents on Oct. 20 before drifting back down to 36 cents on Oct. 26.

Shareholders through their attorneys made two arguments to Bernstein as to why an equity committee should be formed. First, thanks to a 30 percent rise in oil prices since the May bankruptcy filing to around $50 a barrel, shareholders contend Breitburn’s oil-producing assets are now worth more, though how much more is in dispute.

Representatives of Breitburn didn’t respond to requests for comment.

Breitburn, led by Chief Executive Hal Washburn, filed for Chapter 11 bankruptcy protection in May after failing to reach a deal with its lenders. The company’s financial troubles were largely due to the collapse in oil prices. Unlike many other oil producers, Breitburn had the misfortune of completing a $2 billion acquisition of QR Energy of Houston just two months prior to the collapse, leaving it with a huge debt overhang.

In its bankruptcy filing, the company listed its assets – including 7,900 oil and gas wells in California, the Permian Basin of western Texas and eastern New Mexico, and elsewhere – at more than $4.7 billion. In subsequent court filings, however, the total enterprise value of the company, which was founded in 1988, was listed at around $1.9 billion. Shareholders have glommed on to the original $4.7 billion figure in making their case they should get some money back.

Perhaps more importantly, even with nearly worthless shares, individual Breitburn shareholders could be on the hook for tens of thousands of dollars in taxes if some or all of the company’s debts are forgiven.

According to an investor document on Breitburn’s website, if half of the company’s debts are canceled through the bankruptcy reorganization process, the total additional recognized income for Breitburn would be about $1.5 billion, which amounts to about $7 a share. Because Breitburn is a master limited partnership with pass-throughs of income and losses directly to shareholders, this $1.5 billion would be attributed to shareholders as additional income for tax purposes.

Take the case of shareholder David Hensley, who said he owns “more than 15,000” Breitburn shares and was one of several shareholders who petitioned Bernstein to approve the formation of an equity committee. At the current price of 30 cents a share, his stake is worth about $4,500, he told the judge. But he could face taxes on income of more than $105,000 if half the company’s debts are forgiven through the bankruptcy proceedings.

Hensley and other shareholders argued through their attorneys that they needed more actual income so they could pay the tax collector.

USC’s Rasmussen said that this argument was likely key in convincing the judge.

“Equity holders have a big interest in this bankruptcy because they face such a large tax liability due to the unique structure of the business,” he said.

Howard Fine
Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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