The Energy Report

Source: Streetwise Reports   04/17/2020

The status and potential implications of this deal involving BP as the seller are discussed in a Raymond James report.

In an April 13 research note, Raymond James analyst Pavel Molchanov wrote that the pending sale of BP Plc’s (BP:NYSE; BP:LSE) Alaska assets to Hilcorp “is looking dicey.”

The transaction, announced in August 2019, involves Hilcorp, a private oil and gas exploration and production company, buying all of BP’s upstream and midstream operations in Alaska for $5.6 billion. Hilcorp is to pay $4 billion at closing, which is slated for mid-2020, and the rest as an earnout.

However, closing of the deal is uncertain “amid the bleakest oil price backdrop over the past two decades,” Molchanov highlighted. For one, the Regulatory Commission of Alaska, the approval of which is needed for the transaction to be effected, amped up its examination of the deal two weeks ago. It sent 32 questions to Hilcorp and BP including ones that addressed the recent oil price plummet and Hilcorp’s ability to get financing.

Subsequently, it was reported through The Wall Street Journal that Hilcorp was having difficulty obtaining financing for the acquisition. “At current strip pricing, EBITDA from these assets is likely to be less than one-third of the 2018 figure (when West Texas Intermediate averaged $65): let’s say $500 million,” Molchanov described. “Assuming a 6% rate, interest for the cash portion of the purchase would be $240 million. Thus, implied interest coverage would be barely 2x: too close for comfort.”

That said, according to Molchanov, BP does not need the transaction to go through, and Raymond James remains positive on the London-based company regardless. If the sale fails to close, “BP’s net debt/cap would end 2020 at 38.2%, rather than 36.4%,” the analyst explained.

The other possibilities for what could happen regarding the pending sale of BP’s Alaska assets are that the deal gets postponed or the price gets renegotiated, noted Molchanov.

Raymond James has an Outperform rating but no target price on BP. Its stock is trading at around $21.87 per share.

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Disclosures from Raymond James, BP plc, April 13, 2020

ANALYST INFORMATION

Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst’s success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.

The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.

RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.

Raymond James & Associates, Inc. makes a market in the shares of BP p.l.c.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.