goldcanyon341
3 years ago
SIGMUND S. WISSNER-GROSS
direct dial: 212.209.4930
fax: 212.938.2804
swissnergross@brownrudnick.com
October 12, 2021
Via Email and UPS
Board of Directors
Blueknight Energy Partners G.P., L.L.C.
6060 American Plaza, Suite 600
Oklahoma City, Oklahoma 74135
Attn: Duke R. Ligon, Chairman
RE:
Ergon, Inc. Offer to Acquire Common and Preferred Units of Blueknight Energy Partners, L.P.
Dear Mr. Ligon:
We are counsel to DG Capital Management, LLC, which owns and manages affiliated funds (collectively, “DG Capital”) that, we understand in aggregate, are the largest single holder of common units of Blueknight Energy Partners, L.P. (the “Company”). We write, on behalf of DG Capital, to raise preliminary objections by DG Capital to the October 8, 2021 offer of Ergon, Inc. (“Ergon”) to acquire the common units of the Company at a cash purchase price of $3.32 per unit, and preferred units at a cash purchase price of $8.46 per unit. DG Capital believes that the proposed offer is not in the best interests of the Company’s common unit holders (other than Ergon), materially undervalues the Company’s common units, and improperly seeks to shift value to preferred unit holders. Moreover, there are significant and overlapping conflicts of interest and self-dealing concerns here, with Ergon controlling the Board (a majority of the members of the Company’s Board are Ergon designees), a wholly owned Ergon entity serving as the general partner of the Company, and, as Ergon conceding in its October 8 offer letter, Ergon (directly or indirectly) owning a majority of the Company’s preferred units.
It is the position of DG Capital that the proposed cash purchase price of the common units (under a variety of metrics) is materially lower than the present fair market value of such common units. While the October 8 offer letter claims that the proposed consideration “represents a premium of approximately 5% and 3% to the 20-day volume-weighted average price of the Partnership’s common units and preferred units of $3.16 and $8.21, respectively, on the Nasdaq Global Market as of October 7, 2021,” it is the position of DG Capital that the Company’s common units have been artificially depressed in price by the Company and that their fair market value materially
LOGO
Blueknight Energy Partners G.P., L.L.C.
October 12, 2021
Page 2
exceeds the proposed offer price of $3.32 per common unit. Whether the common units have been artificially depressed in price as a result of willful or intentional conduct by Ergon and its representatives on the Company’s Board in an effort to later line the pockets of Ergon, or others, is outside the scope of this letter, and may need to be determined at a later juncture, if the Company insists on moving forward in discussions with Ergon regarding the proposed transaction at the current offer price. Our client is further concerned that the timing of the proposed offer, just as Congress is about to approve a major infrastructure bill that, according to the Company’s CEO, would generate substantial revenue and increased EBITDA for the Company over the next several years, suggests that Ergon, which together with its affiliates owns approximately 60.4% of the outstanding preferred units (in addition to owning approximately 6.6% of the outstanding common units), has majority control of the Company’s Board through an Ergon-owned affiliate which is the general partner of the Company, exercises effective control over the Company, is advancing a proposed offer that represents self-dealing at its worst, all to the detriment of the common unit holders. While we understand that a “Conflicts Committee” of the Board of Directors of Blueknight Energy Partners G.P., L.L.C., will according to the October 8 offer letter “review, evaluate and negotiate the terms of a transaction,” DG Capital reserves all rights as to the purported independence of the Conflicts Committee and its role in reviewing, evaluating and negotiating the terms of a proposed transactions, and does not waive any rights in such regard.
DG Capital’s concerns include, but are not limited to, the following four illustrative issues:
1.
The Company has successfully engaged over the past several years in a restructuring effort, that has resulted in a material deleveraging of the Company. The Company’s capital needs are modest, at best. The Company has substantial liquidity and balance sheet capacity, which should have resulted in larger distributions being issued to the Company’s common unit holders. DG Capital believes that the Company, in an effort to suppress the trading value of its common units, has kept its distributions artificially lower than they should have been. The fair market value of the Company’s common units, under a variety of valuation metrics, is materially higher than the proposed $3.32 per unit offered by Ergon for the common units. The role of Ergon, as well as its affiliate general partner of the Company, and the Directors of the Company in not distributing appropriate value to the common unit holders, and whether any Board decisions were made to artificially suppress the market value of the common units to unjustly favor Ergon and its affiliates, remains to be determined. We would caution both the Conflicts Committee and the Board that the common unit holders constitute the true holders of the residual interest in the Company and are owed fiduciary duties. At a minimum, it would appear to be a breach of fiduciary duty for the Board to enter into or approve a proposed transaction that strips common unit holders of such value and improperly shifts value to preferred unit holders.
2.
The Company’s preferred unit holders should be paid far less, under various valuation metrics. Such preferred units have a conversion strike price of $6.50. The proposed offer of $8.46 for preferred units, when Ergon and its affiliates own approximately 60.4% of such preferred units, represents a transparent and flagrant effort by Ergon and the Company to improperly shift value to the preferred unit holders at the expense of
LOGO
Blueknight Energy Partners G.P., L.L.C.
October 12, 2021
Page 3
the Company’s fulcrum security holders, i.e., the common unit holders. Moreover, providing each preferred unit with merger consideration that is a substantial premium to either its liquidation preference or conversion value represents a fundamental misallocation of value that instead should be paid to holders of the common units. It would appear to be a breach of fiduciary duty for any Board member, under the circumstances, to enter into or approve a proposed transaction which shifts value from common unit holders to the out of the money (on an as converted basis) preferred unit holders. While DG Capital appreciates that the Company’s preferred unit holders may welcome such an unwarranted windfall, proper corporate governance does not sanction such transparent and improper value shifting to benefit a controlling holder such as Ergon.
3.
The timing of the proposed offer could not be more suspect. It is well known that a major infrastructure bill is about to be approved by Congress. The Company will be a major beneficiary, for years to come, of the infrastructure bill. Indeed, on a recent investor call for the 2Q21 Quarterly Results, the Company’s CEO stated that the federal infrastructure bill could result in an increase in annual federal spending on road construction and highway work of close to 30%, resulting in at least three types of concrete financial benefits to the Company. He first noted that the federal infrastructure bill “could translate into anything from 5% to 8% higher EBITDA or operating margin for [the Company’s] asphalt business.” He further noted that the federal infrastructure bill “supports more favorable [contract] renewal environments.” Finally, he noted that the federal infrastructure bill would help to generate new organic growth projects for the Company. See Q2 2021 Earnings Call, at pages 11-12. As you presumably are aware, back in May/June 2021, when it was anticipated that a federal infrastructure bill would pass, the Company’s common units traded over $4 per unit. Putting aside the issues discussed above regarding the Company’s artificial suppression of the value of the common units and efforts to improperly shift value to the Company’s preferred unit holders, if, as expected, the federal infrastructure bill is passed and becomes law later this year, there will be significant potential upside for the Company. Accordingly, Ergon’s cynical effort to steal value and lock the Company into a proposed merger transaction with a steep discount price being offered to common unit holders, just before the infrastructure bill is passed, should be summarily rejected. It is rank self- dealing, and neither the Board nor the Conflicts Committee should sanction it.
4.
We also note that Ergon, which controls the Company as noted above, appears to be orchestrating the proposed transaction to have the Company otherwise fail to comply with best corporate governance practices under Delaware law. For example, the proposed offer does not indicate that the transaction will be conditioned on the approval of a majority of the disinterested common unit holders. This further brings into focus the degree to which the proposed offer reeks of self-dealing and constitutes nothing more than an attempt by Ergon to unjustly enrich itself at the expense of the common unit holders.
LOGO
Blueknight Energy Partners G.P., L.L.C.
October 12, 2021
Page 4
While DG Capital reserves all rights, please be advised that DG Capital is prepared to engage, in good faith, with the Board and/or the Conflicts Committee to ensure that common unit holders are treated fairly and that, if a transaction is to occur, it be done with value allocation metrics that are consistent with proper corporate governance to assure that fiduciary duties owed to the common unit holders are upheld. Based upon the foregoing, it is DG Capital’s position that the fair market value of the common units exceeds $6.00 per unit and that is without accounting for the additional potential upside to the value of the Company’s common units resulting from the passage of the proposed infrastructure bill, which the Company expects to be significant. The foregoing represents the preliminary analysis of DG Capital with respect to the proposed offer, and DG Capital reserves the right to supplement this letter as its investigation and analysis of the Ergon offer and the proposed transaction continues.
Our client would like to further present its views to you and other members of the Conflicts Committee and/or to the Board, and proposes to do so within the next week. Please let us know your availability at your earliest convenience.
Sincerely,
BROWN RUDNICK LLP
/s/ Sigmund S. Wissner-Gross
Sigmund S. Wissner-Gross
mgland
6 years ago
Press Release: Blueknight Declares Quarterly Distributions
5:30 pm ET April 22, 2019 (Dow Jones) Print
Blueknight Declares Quarterly Distributions
OKLAHOMA CITY--(BUSINESS WIRE)--April 22, 2019--
Blueknight Energy Partners, L.P. (NASDAQ: BKEP - Common Units) (NASDAQ: BKEPP - Preferred Units) ("BKEP" or the "Partnership"), announced today that the board of directors of its general partner has declared a quarterly cash distribution on the Partnership's common units of $0.04 per common unit, as well as a cash distribution of $0.17875 per unit on the Partnership's preferred units. "The reduction of the common unit distribution to $0.04 per common unit is a key step in our efforts to strengthen our balance sheet," stated Mark Hurley, CEO of the Partnership. "Our previous earnings guidance, as well as our year-end targets of distribution coverage greater than 1.0x and a leverage ratio between 4.0x and 4.5x, remain unchanged." The distributions are payable on May 14, 2019, on all outstanding common and preferred units to unitholders of record as of the close of business on May 3, 2019.
Forward-Looking Statements and Treasury Regulation Notice
This release may include forward-looking statements. Statements included in this release that are not historical facts are forward-looking statements. Such forward-looking statements are subject to various risks and uncertainties. These risks and uncertainties include, among other things, uncertainties relating to the Partnership's future cash flows and operations, the Partnership's ability to pay future distributions, future market conditions, current and future governmental regulation, future taxation and other factors discussed in the Partnership's filings with the Securities and Exchange Commission. If any of these risks or uncertainties materializes, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those expected. The Partnership undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
This release is intended to be a qualified notice under Treasury Regulation Section 1.1446-4(b) (4) and (d). Brokers and nominees should treat one hundred percent (100.0%) of BKEP's distributions to foreign investors as being attributable to income that is effectively connected with a United States trade or business. Accordingly, BKEP's distributions to foreign investors are subject to federal income tax withholding at the highest applicable effective tax rate. Nominees, and not BKEP, are treated as withholding agents responsible for withholding on the distributions received by them on behalf of foreign investors.
About Blueknight Energy Partners, L.P.
mgland
6 years ago
Blueknight Energy Partners, L.P. Announces Timing of Fourth Quarter and Full Year 2018 Financial Results and Conference Call
Print
Alert
Blueknight Energy Partners L.P., L.L.C. Representing Limited Partner Interests (NASDAQ:BKEP)
Intraday Stock Chart
Today : Tuesday 5 March 2019
Click Here for more Blueknight Energy Partners L.P., L.L.C. Representing Limited Partner Interests Charts.
Blueknight Energy Partners, L.P. (“BKEP” or the “Partnership”) (NASDAQ: BKEP) (NASDAQ: BKEPP), plans to release fourth quarter and full year 2018 financial results after market close on Monday, March 11, 2019.
The Partnership will discuss fourth quarter and full year 2018 results during a conference call on Tuesday, March 12, 2019, at 10:00 a.m. CDT (11:00 a.m. EDT). The conference call will be accessible by telephone at 1-888-347-8968. International participants will be able to access the conference call by calling 1-412-902-4231.
Participants are requested to dial in five to ten minutes before the scheduled start time. An audio replay will be available through the Investors section of the Partnership’s website at http://investor.bkep.com for 30 days.
About Blueknight Energy Partners, L.P.
BKEP owns and operates a diversified portfolio of complementary midstream energy assets consisting of:
8.8 million barrels of liquid asphalt storage located at 53 terminals in 26 states;
6.9 million barrels of above-ground crude oil storage capacity located primarily in Oklahoma, approximately 6.6 million barrels of which are located at the Cushing Interchange terminalling facility in Cushing, Oklahoma;
646 miles of crude oil pipeline located primarily in Oklahoma and Texas; and
60 crude oil transportation vehicles deployed in Kansas, Oklahoma and Texas.
BKEP provides integrated terminalling, gathering and transportation services for companies engaged in the production, distribution and marketing of liquid asphalt and crude oil. BKEP is headquartered in Oklahoma City, Oklahoma. For more information, visit the Partnership’s web site at www.bkep.com.
View source version on businesswire.com: https://www.businesswire.com/news/home/20190305005911/en/
BKEP Investor Relations, (918) 237-4032
investor@bkep.com
or
BKEP Media Contact:
Brent Gooden, (405) 715-3232 or (405) 818-1900
mgland
6 years ago
Not good. they need to address the uncertainty.....
https://seekingalpha.com/article/4245393-blueknight-common-distribution-elimination-coming
Blueknight: Common Distribution Elimination Coming?
Feb. 28, 2019 4:06 PM ET|
66 comments
|
About: Blueknight Energy Partners (BKEP), BKEPP, Includes: AMR, BPL, I, II, III, SEMG
Michael Boyd
Michael Boyd
Long/short equity, contrarian, medium-term horizon, mid-cap
Marketplace
Industrial Insights
(9,991 followers)
Summary
Blueknight has long been (in my view) a poor play.
Recent news on the termination of the Cimarron Pipeline, as well as structural concerns for Alta Mesa, mean bad news.
The company will owe money for a stranded asset that will never generate money.
Without Cimarron, already relaxed covenants are at risk of violation in 2020. The payout on the common should be cut to zero.
The preferreds are likely covered from asphalt earnings, but the market might still react negatively to 2019 results.
This idea was discussed in more depth with members of my private investing community, Industrial Insights. Start your free trial today »
Wondering why the unit prices of Blueknight Energy Partners (NASDAQ:BKEP) has gotten blown out of the water recently? You might not be alone. News coverage has been pretty bare, and without understanding the asset base and checking SEC filings, one might be left scratching their head. I've been recommending against a position in the firm for quite some time internally within my Marketplace service, holding a Sell rating for more than a year. Given the lack of coverage on the negative drivers on the firm, I wanted to bring a quick update public so that investors can make a rational decision on what is going on here.
Asset Overview, The Major Problem That Hit Blueknight
Established in 2007 in Oklahoma City, Blueknight Energy Partners has had an interesting history. Originally called SemGroup Energy Partners, the company was once part of what is now SemGroup (SEMG) but was itself acquired by Vitol in 2009. That marriage lasted for some time until Ergon bought out the existing general partner ("GP") in 2016, an entity that at the time was owned 50/50 by Charlesbank Capital Partners and Vitol Holdings. Members might recognize the Vitol name; they operate the global VTTI joint venture ("JV") with Buckeye Partners (BPL).
Blueknight Energy Partners is perhaps best known for its asphalt operations. Even after recent sales and rolling back up assets to the general partner ("GP"), the company still operates the largest independently owned asphalt terminal network in the United States. My quibbles with the firm have never been with these assets - it lies with its crude oil operations.
Blueknight operates a crude oil terminalling business at Cushing with 6.6mm barrels of storage. Elsewhere, the company's attempts at operating pipelines, primarily the Oklahoma Pipeline assets and what was the potential eventual dropdown of the Cimarron Express Pipeline ("Cimarron"), have not been major contributors to earnings. However, they have held significant weight for Blueknight in the future. The implicit goal with these pipelines is to drive oil flow into Blueknight-owned Cushing storage tanks, and this vertical integration is necessary to do that. Additionally, the company recently ramped up its marketing business (where it buys crude and sells it) in April of 2018, a move that drew questions from me on whether third party volumes could be maintained.
Cushing has not been the place to be, particularly for storage owners that are reliant on trading volumes and cannot attract E&P customers. The once-great storage hub has been losing its importance as producers focus on gulf export. In my view, it is structurally overbuilt, and utilization had plunged to as low as 25% recently before recovering somewhat. Cimarron was supposed to be a way for Blueknight to combat this. However, I had this to say in September of last year:
Despite Permian bottlenecks and wider differentials, most operators continue to focus on the Permian despite more expensive acreage. Alta Mesa Resources (AMR), the JV partner in Cimarron, is stating that it is bucking this low growth trend. The company is guiding to exit 2018 with 40kboe/d of production, doubling 2017 production. That might be a bit too aggressive; most players in Anadarko have not been doing a great job executing on meeting production targets in recent quarters.
We now have seen this overly aggressive estimates come to pass. Alta Mesa Resources released this statement as part of its Q4 earnings release:
Kingfisher Midstream has made the decision to suspend future investments in Cimarron Express Pipeline, LLC ("Cimarron Express"). The anticipated volumes from the currently dedicated acreage, and the resultant project economics, do not support additional investment in Cimarron Express at this time.
Cimarron is dead in the water, and it likely sends a very negative signal on Anadarko volumes into Cushing elsewhere. But the bad news doesn't stop there. The JV has already spent $30mm on the pipeline project, and without dedicated acreage, the asset is near worthless. Recall that the JV got next to no interest in a prior run open season, and it is unlikely to do so now. This means that money spent to date on construction has essentially been lit on fire. Blueknight stated this in an 8-K filing (no press release):
Ergon has the right to require BKEP to purchase one hundred percent (100%) of the authorized and outstanding member interests of Devco for the Purchase Price (the "Put") at any time beginning the earlier of (I) eighteen (18) months from the formation of the joint venture company to build the pipeline, (II) six (6) months after completion of the pipeline, or (III) the event of dissolution of the Cimarron Express joint venture.
As of December 31, 2018, Cimarron Express had spent approximately $30 million on the pipeline project. Both BKEP and Ergon are currently evaluating the status of the investment in Cimarron Express. To the extent the Put is exercised in the future, BKEP would be responsible for 50% of the total amount spent by the pipeline project plus interest at 9% per annum. BKEP anticipates the principal cost of the Put could be reduced by $4 million to $7 million upon the sale of the assets of the Cimarron Express joint venture, for a total net cost to Blueknight of $8 million to $11 million plus interest.
Long story short, Ergon can dump Cimarron's problems on the MLP. Sound like pocket change? Not really for a company that has a $61mm market cap. That payout represents more than an entire year's worth of distributable cash flow after payments on the preferreds, perhaps worse if there are no takers for stranded pipeline assets with no demand. Additionally, without Cimarron, it seems unlikely that the firm will be able to get their coverage up over 1x, setting the stage for yet another dividend cut in 2019.
In my view, EBITDA will come in at $58mm in 2019, allowing for just $13mm in distributable cash flow ("DCF") to the common stock ($14mm interest, $6mm maintenance, $25mm preferred payouts). The coverage is barely there on a distribution that was cut less than one year ago.
Making matter worse, leverage has to be below 4.75x in a little over one year on the recently amended credit agreement. Assuming they roll $12mm in debt into the credit facility to pay for the put option, leverage will be 4.9x at year end. If lenders balk at yet another relaxation in the covenants, the company will be in dire straits. The smart decision here would be to cut the common distribution to zero and get to work on delevering the balance sheet with every dollar that they can. Sending more assets back upstream to the GP just unwinds operational leverage.
Takeaway
Blueknight is in dire straits. Leverage is too high, and there is now no real path to delevering the balance sheet with free cash flow. It will not grow its way out of its problems. The crude operations have been absolutely dismal and in stark contrast to the asphalt operations, which have seen expanding margins in recent years.
If you own the preferred (BKEPP), I get it. There is coverage even when assuming everything excluding asphalt is junk. Yet I think sentiment there might get dragged down with the negative news likely coming on the common stock. A distribution cut and focus on delevering would be positive for the preferred, but would also emphasize how close the preferred payouts are to being impacted. Those are a toss-up play to me.
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