BPZ Resources has announced they are filing for Chapter 11 bankruptcy protection as a result of worldwide falling oil prices.
Filing for Chapter 11 Bankruptcy Protection in Light of Falling Oil Prices
The oil and natural gas exploration company has filed for Chapter 11 bankruptcy protection, citing the plunge in oil prices that has happened over the last year and its inability to find financing. The Houston based company plans to stay in business during the proceedings according to its petition for bankruptcy reorganization filed in the U.S. Bankruptcy Court for the Southern District of Texas.
After a year of losses linked to falling oil prices, the filing is not surprising. BPZ Resources Inc. has reported an annual loss every year since at least 2005. During that period of time the company has reported losing about $280 million. During the first three quarters of 2014, it took a loss of $51.4 million. Striking fact when compared to the same period in 2013, during which the company’s revenue rose 70 percent to $65.6 million. As of September 30, 2014, it had short- and long-term debt of $228.6 million outstanding.
Falling Oil Prices
BPZ is not the only oil company that has taken a hit in the last year. Since June 2014 prices of oil have more than halved. Prior to June of last year, world oil prices had been fairly stable – around $110 a barrel since 2010. Brent crude, a known benchmark for international oils that is used by many U.S. refineries, closed at $58.53 a barrel yesterday. That’s roughly half its average price between 2010 and the middle of 2014.
The reason behind this drop in oil prices has multiple factors: weak demand as the result of weak economic growth, in addition to the fact that the US has upped its oil production as the result of increased fracking. Additionally, oil cartel OPEC has determined not to cut any of of its production as a way to prop up prices. Bottom line, and a main rule of economics: supply is more than demand.
BPZ Resources Inc.
BPZ Resources Inc. is an independent oil and gas exploration and production company that owns acreage in Peru and off the coat of the South American nation. The company’s license contracts cover approximately 1.9 million net acres in four properties in northwest Peru. The Company is listed both on the New York Stock Exchange and Bolsa de Valores in Lima, Peru under the ticker symbol BPZ.
Other Oil Companies
Other oil companies are dealing with the same faltering oil prices. Chevron has announced its plans to cut spending and lower costs as it deals with falling oil prices. And several other energy companies, including Exxon Mobil, have also made plans to trim back spending as well as cut back on the amount of drilling. As of now production, especially in the U.S., greatly outweighs demand.
“We are well-positioned to manage through the recent drop in commodity prices,” said John Watson, Chevron’s CEO and chairman.
Chapter 11 Bankruptcy Protection
Under a Chapter 11 bankruptcy protection plan, a debtor is able to reorganize and restructure its financial affairs. The plan is a contract between the debtor and the debtor’s creditors that outlines how a debtor will operate and pay for future obligations.
Often this plan means a debtor will need to downsize operations in order to reduce expenses and free up assets. Often times, as is currently being seen with Chevron and similar oil companies, a move to cut spending and lower costs is a way to recoup some money in order to avoid bankruptcy.
Liquidation and Chapter 11
In some cases, where restructuring will not yield enough income to pay debts, a “liquidation plan” is necessary. Under liquidation, a debtor’s operations are shut down and its remaining property is sold to recoup money to pay off creditors.
Proposing Reorganization
Typically, a debtor receives four months to propose a reorganization plan following its initial filing of Chapter 11. This “exclusivity period” can be extended to up to 18 months following the petition date if the debtor is able to show good cause. While it can be extended, it can also be shortened, depending on the circumstances of the filing.
After the “exclusivity period” ends, the creditors’ committee and/ or other parties are able to propose competing reorganization plans. This is a fairly rare practice though. In these cases, it’s typical that a creditor committee or other party will move to either dismiss the bankruptcy filing or convert the case to Chapter 7. During Chapter 7 a bankruptcy trustee cancels many (or all) of the company’s debts. This can also mean the trustee will sell, or “liquidate” some of the property to pay back creditors.
Though rare, occasionally, a Chapter 11 reorganization plan will allow for every creditor to be paid back immediately, and in full. If this is not the case, as per usual, creditors are allowed to vote on whether or not they will accept the proposed Chapter 11 plan.
During this vote, at least one class of “impaired” claims must approve the Chapter plan in order for the plan to be approved by the bankruptcy court. Upon the plan being confirmed, an “impaired” claim is an obligation that will not be paid in full or when originally due.
Bankruptcy Court Approvals
The bankruptcy court must also approve:
- any sale of assets (property or real property). This excludes items such as inventory that is sold by a retail debtor during the ordinary course of business. For example; if a t-shirt company files for bankruptcy, they would still be allowed to sell their t-shirts.
- entering into or breaking a lease on real or personal property.
- mortgages or other secured financing arrangements that will allow the debtor to borrow money after the bankruptcy case is filed.
- the shut down or expansion of business operations.
- entering into or modifying union, vendor, licensing, and other agreements and contracts, and
- the retention of, and payment of fees and expenses to, attorneys and other professionals.
Role of Creditors
Creditors, shareholders, and other parties that have a vested interest in the company are able to support or oppose actions that will require bankruptcy court approval. These interests and opinions will be considered in bankruptcy court and determinations on how to proceed will be made. It’s only under Chapter 11 plans that formal votes are given by creditors and equity holders.
Unsecured creditors typically participate in Chapter 11 cases via a bankruptcy committee that is appointed to represent their interests. This committee is allowed to retain attorneys at the debtor’s expense. In some bankruptcy cases, shareholder committees are also able to take an active role in the bankruptcy decisions.
Confirmation of the Chapter 11 Plan
“Confirmation” is when a proposed bankruptcy plan is approved by a bankruptcy court. In order to confirm a Chapter 11 bankruptcy plan, the court needs to rule that the plan meets numerous requirements, including:
Feasibility. Feasibility means the proposed plan is likely to succeed. A debtor will need to prove that it will be able to raise sufficient revenues during the course of the plan’s term in order to cover its expenses and payments to creditors.
Good Faith. The plan needs to be proposed in good faith and not by means forbidden under applicable law.
Best Interests of Creditors. The plan must be in best interests of its creditors, meaning that a creditor will receive at least as much under a proposed Chapter 11 plan as they would had the case been converted to a Chapter 7 liquidation. This “best interest” often means that the debtor will need to pay a creditor in pull. Typically, Chapter 11 debtors are not able to meet this “best interest” and thus only pay a fraction of what they owe.
Fair and Equitable. The plan also must be “fair and equitable,” meaning the following:
- Secured creditors (meaning it has a mortgage against a real property or lien against personal property like inventory and equipment) must be paid, over time, at least the value of their collateral.
- The debtor is not able to retain anything on account of their equity interests until all obligations are paid in full. This is either immediately upon plan confirmation or over time (which includes interest). A bankruptcy court is able to allow equity holders to retain ownership interests in the debtor in exchange for “new money” that is put towards paying reorganization expenses. Otherwise, equity holders lose all ownership rights once the plan is confirmed.
Some of the confirmation requirements (like the fair and equitable test) are only applicable if the affected creditors vote against the proposed bankruptcy plan.
Does Chapter 11 Work?
Studies show that about 10 to 15% of Chapter 11 cases are successful, meaning the company is able to reorganize. Often cases are dismissed or converted to Chapter 7 liquidations. For a case to be dismissed the bankruptcy court must approve its dismissal. Conversion or dismissal can be done if a debtor fails to show it will be successful in reorganizing.
Working With a Bankruptcy Attorney
Bankruptcy law can be intricate and confusing. Because of this, if you believe you are a candidate for bankruptcy, you should immediately contact a bankruptcy attorney. They will be able to look at your case and your financial situation to determine if you are a good candidate, and what type of bankruptcy you should file.