BP Deal at Risk As Banks Hesitate On Low Oil Prices -- WSJ
April 10 2020 - 3:02AM
Dow Jones News
By Sarah McFarlane and Christopher M. Matthews
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 10, 2020).
BP PLC's sale of its Alaskan business is in jeopardy after a
group of banks balked at financing the $5.6 billion deal to buyer
Hilcorp Energy Co. amid a historic rout of oil and gas prices,
according to people familiar with the deal.
A failure to complete the deal would be a blow to BP, which
already has the highest debt levels -- in relation to its size --
among the major oil companies and is counting on the transaction to
help reduce its debt. It is the largest deal involving oil and gas
production assets globally that has yet to close, according to data
provider Dealogic.
A group of banks led by JPMorgan Chase & Co. and including
Wells Fargo & Co. had earlier discussed providing privately
held Hilcorp with a reserve-based lending facility to help finance
the deal. The proposed vehicle would essentially be a loan based on
the future cash flows from oil and gas assets. But the collapse in
oil prices related to the coronavirus pandemic and cratering energy
demand has made the banks uncomfortable providing the loan, say the
people familiar with the matter.
BP declined to comment on the deal. JP Morgan and Wells Fargo
also declined to comment.
The global benchmark oil price has fallen nearly 60% this year
as an unprecedented glut of crude builds while much of the global
economy is closed. BP's shares are down 29% this year, in line with
peers such as Chevron Corp. and Total SA.
BP and other large, Western oil companies have been using asset
sales to help fund their capital expenses and dividend payments to
investors for years. But the market for oil and gas assets has
become virtually nonexistent, meaning major oil firms may have to
take on more debt to fund their budgets and maintain investor
payouts.
For BP, the deal with Hilcorp represents a large chunk of the
$15 billion asset sales it aims to complete by mid-2021. The
divestments should help lower the company's gearing -- the ratio of
net debt to the total of net debt and equity -- which stood at 35%
including leases in the fourth quarter, higher than any of its
peers. This is above the company's long-term target level of
between 20% and 30%.
The company said in a trading update last week that it expected
the deal with Hilcorp to close by the end of this year, subject to
regulatory approvals. Some analysts said that this wasn't their
expectation however and that they had removed the divestment income
from cash proceeds.
The Regulatory Commission of Alaska asked Hilcorp Energy on
April 2 to explain whether the recent changes in financial markets
have impacted its access to capital to finance the purchase of BP's
assets, requesting a response by May 4.
Hilcorp management told bond investors on a call on Friday that
whether the deal proceeds or not, its goal is to have things move
forward on an amicable basis with BP, because they've done lots of
transactions in the past and they'll continue to do business,
according to a recording listened to by The Wall Street
Journal.
A Hilcorp spokesman didn't respond to a request for comment.
Hilcorp's past acquisitions of BP assets in Alaska include a
2014 deal for BP's interests in four oil fields and associated
pipelines.
Lenders were already pulling back from oil-and-gas companies
before the current rout, and the virus has only made money harder
to come by. The majority of oil-and-gas companies expect their
revolving lines of credit to be cut by 20% or more this spring,
according to an April survey of companies by U.S. law firm Haynes
and Boone LLP.
The yield on Hilcorp Energy Co.'s bonds due in 2028 was around
20% on Wednesday, up from around 6.5% in early January, according
to MarketAxess, leading investors to say Hilcorp's bonds appear
distressed.
"Given the current capital markets environment, financing could
be challenging for the proposed BP transaction," rating agency
S&P Global said in a note published on Tuesday.
S&P Global said it would be "challenging" for Hilcorp to get
back the $500 million deposit it had already paid for BP's assets,
even if the transaction doesn't close.
In the midst of the demand-sapping coronavirus outbreak, BP has
recently pledged austerity, saying it will cut its budget by 25%
earlier this month and is planning to cut costs by $2.5 billion
over the next two years.
The British giant's competitors also have large divestment
programs that will be challenged for the foreseeable future. Exxon
Mobil Corp. has also targeted $15 billion in asset sales, which it
previously said were on track. This week, Exxon said it would cut
its budget for 2020 by $10 billion.
--Sam Goldfarb and David Benoit contributed to this article.
Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and
Christopher M. Matthews at christopher.matthews@wsj.com
(END) Dow Jones Newswires
April 10, 2020 02:47 ET (06:47 GMT)
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