Plains E&P makes debt fueled deepwater bet in Gulf of Mexico
BY ANGEL GONZALEZ
HOUSTON -- The big costs and sizable risks of deepwater oil and gas production have pushed most small oil companies out of the Gulf of Mexico's deeper waters. But with a debt fueled $6 billion purchase of BP and Royal Dutch Shell assets, Plains Exploration & Production is digging in. The company said that it would buy BP's interests in the Marlin, Horn mountain and Holstein projects and other assets for $5.5 billion; it also said it would buy Shell's controlling stake in Holstein for $560 million, a show of confidence in its ability to run complex deepwater operations on its own.
In a way, the company is building on a path well trodden by small, so called independent oil companies in the Gulf's shallow waters, where oilfields were originally developed by major oil companies with deep pockets and sold off to smaller players as the bigger ones lost interest. Companies like Apache grew big that way. "This will be the first opportunity for an independent to do that in the deepwater because the infrastructure has been so expensive," except for the oil majors and for sizable, deep pocketed oil explorers like Anadarko, Plains Chief Executive James Flores said on a conference call.
Plains' deepwater bid is an ambitious move. To pay for the assets, which will double its payroll and increase production by 40%, the company is borrowing about $7 billion, which will tie up a significant part of its newly added cash flow for a few years, and it exceeds the company's post deal market capitalization of $4.7 billion. To pay for its bet, Plains will sell natural gas assets and hedge a significant portion of its oil production. Investors didn't seem too excited about the deal. Plains shares were down 9.27% at $36.59.
The deal wasn't seen as cheap by analysts. But Plains will likely pursue development options with the fields that will perhaps justify "a value above what the fields would be worth if left in BP's hands," said analysts with Tudor, Pickering, Holt. The acquisition was also a surprising move for a company that in recent years, thanks to the combination of enticing opportunities in onshore shale fields and to the heightened perception of offshore risk after the Deepwater Horizon disaster, sought to expand onshore instead.
According to Mr. Flores, the move was done not in a strategic, but in an opportunistic way, triggered by BP's plan to shed billion dollars of assets after the Deepwater Horizon spill. The main allure was the possibility of getting a big influx of oil production much more valuable than natural gas production amid a market glut for that commodity. "Who knew BP would want to sell some assets and not redevelop these assets on their own?," Mr. Flores said on the conference call. "An opportunity like this, this is a once-in-a-cycle opportunity."
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