PXP's $6.1 bln BP/Shell deal quacks like an LBO
Call it a self-leveraged buyout. Plains Exploration & Production, a relative minnow among U.S. oil groups with a $4.7 billion market value, is leveraging up big-time to buy $6.1 billion of deep sea Gulf of Mexico fields from BP and Royal Dutch Shell. Shareholders will come second until lenders are happy - and there are operational risks as well as financial ones. No wonder PXP’s stock tanked.
The company’s $7 billion of new debt facilities - more than the total size of the deals unveiled on Monday - underline the LBO-like nature of what PXP boss James Flores is undertaking in a bold effort to take on mostly far bigger players in deep sea drilling.
PXP as a whole will look more like a buyout candidate, too. The numbers disclosed by the company suggest borrowing will come close to $10 billion after the deal is consummated at the end of the year - about three times PXP’s current net debt, and more than double the value of its shares. That debt figure is also about three times the company’s likely EBITDA in 2013 after the deal, as estimated by KeyBanc Capital Markets. That’s not so aggressive by LBO standards, to be fair, but it’s still about twice the ratio at present.
The company tried to put the best gloss on its ramp-up in financial risk by showing how asset sales and cash flow could reduce leverage over time. But PXP neglected to mention how much debt it might have this year, preferring to talk about the end of 2013, by which time it hopes the total will be under $7 billion. Credit metrics that are more normal for its sector are anticipated only by 2015.
As long as the ex-BP and Shell wells don’t run into mishaps, a big hedging program means PXP’s promised free cash flow - a projected $1 billion next year - should help pay down debt. Asset sales, however, could prove less reliable. With natural gas prices in the doldrums, the $1.5 billion to $2 billion of hoped-for proceeds may not come quickly.
Meanwhile, though PXP isn’t yet pioneering new wells, BP can attest to the danger if something does go wrong operationally. Banks backing the deal must be comfortable with that risk. But for shareholders, who knocked more than 10 percent, or about $500 million, off the company’s market value, the bigger worry may be that PXP’s balance sheet will soon look like it belongs in a private equity portfolio.