By Peg Brickley and Tom Corrigan 

Breitburn Energy Partners LP filed for chapter 11 bankruptcy protection Sunday, taken down by plunging oil prices.

Business operations will continue while Breitburn negotiates a restructuring of its balance sheet, continuing talks with creditors that began a month ago, Chief Executive Hal Washburn said in a release.

The 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.

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.

"We think we can get to the finish line in relatively quick order if there is consensus," Ray Schrock, a lawyer for Breitburn, said during a bankruptcy court hearing Monday.

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.

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.

Chapter 11 financing from existing senior lenders could include an additional $75 million, if certain conditions are met, according to court papers.

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.

Breitburn has crude oil and natural gas assets in the Midwest, Ark-La-Tex, the Permian Basin, the Mid-Continent, the Rockies, the Southeast and California.

Write to Peg Brickley at peg.brickley@wsj.com and Tom Corrigan at tom.corrigan@wsj.com

(END) Dow Jones Newswires

May 16, 2016 17:47 ET (21:47 GMT)

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