Plains Exploration to Buy Gulf Fields for $6.1 Billion

Plains Exploration & Production Co. (PXP) agreed to buy BP Plc (BP/)’s and Royal Dutch Shell Plc (RDSA)’s stakes in a group of Gulf of Mexico oil fields for $6.1 billion, doubling crude production in its biggest acquisition since 2007.

BP, which has been selling assets after causing the worst marine oil spill in U.S. history, sold its fields for $5.55 billion. Shell sold its stake in a field co-owned with BP for $560 million, according to a statement today.

The acquisition amount is larger than Houston-based Plains’ market value. The purchase gives Plains oil production in the Gulf’s deep waters two years after it sold shallow-water assets to focus onshore. The company, which started the day with a market value of $5.2 billion, will borrow $7 billion for the deals. The shares fell the most in 13 months.

“Their change in strategy took everybody by surprise,” Eliecer Palacios, a New York-based energy sector specialist for Maxim Group LLC who doesn’t rate or own the stock, said today in an telephone interview. “Deep-water production is usually capital intensive and they’d indicated to the street they wanted to get out of it.”

Plains declined 11 percent to $36.09 at the close in New York, the most since Aug. 8, 2011. BP rose 0.7 percent to 437.8 pence at the close in London.

‘Full Price’

Plains paid “full price” for the fields and needs to find oil deeper or nearby to make the deals work, Duane Grubert, a Stanford, Connecticut-based analyst for Susquehanna Financial Group, wrote in a note to clients today.

Standard & Poor’s put Plains’ ratings on watch with negative implications. “The acquisition represents a strategic shift for Plains and presents increased execution risk, particularly given the complexities associated with operating in the deep-water Gulf,” according to an S&P note today from a group of analysts led by Lawrence Wilkinson.

The acquisition is Plains’ biggest since it bought Pogo Producing Co., adding onshore U.S. fields for $5.84 billion of cash, stock and debt in 2007, according to data compiled by Bloomberg.

Production from the deep-water fields is equivalent to 67,000 barrels of oil a day and is expected to increase as more wells come online, James C. Flores, Plains chairman and chief executive officer, said on a conference call today.

Controlling Destiny

The purchase will make Plains owner of three offshore platforms, Flores said on the call. It includes sole ownership of BP’s Marlin, Dorado, King and Horn Mountain fields and minority stakes in fields operated by Exxon Mobil Corp. (XOM) and Shell. Plains gets full ownership of the Holstein field and platform, buying both halves from BP and Shell.

“There’s only one way to play the deep-water Gulf of Mexico: It’s with infrastructure,” Flores said of the platforms on the call. “We’ll be able to control our own destiny.”

Deep-water platforms can cost $2 billion before pumping any oil, he said later in an interview. The three platforms will pay for themselves as Plains drills additional wells neglected by BP as it sought higher profits elsewhere, he said.

“The deal is accretive and it will make sense, but it changes investors’ time line a bit,” said David Deckelbaum, an analyst for KeyBanc Capital Markets in Cleveland, Ohio. Plains paid about $91,000 for each flowing barrel of crude from the fields. Deckelbaum said a comparable price for recent transactions is about $60,000.

Selling Gas

Plains will reduce borrowings by selling stakes in natural- gas fields for as much as $2 billion and with $1 billion of annual free cash from the Gulf fields, Chief Financial Officer Winston Talbert said on the call.

The company will sell stakes in Wyoming gas fields operated by ConocoPhillips (COP) and in Louisiana’s Haynesville shale mostly operated by Chesapeake Energy Corp. (CHK) within a year, Flores said. It will hedge as much as 90 percent of oil output to cover debt payments and reduce borrowings, he said.

Plains’ $1 billion of 6.75 percent notes due February 2022 fell 2.75 cents to $1.06 on the dollar to yield 5.78 percent as of 2:22 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“There’s always disruption when you’re talking about deals of this size versus our enterprise value,” Flores said of the share price decline today in an interview. “We’ve got to go out and hold a few hands and make sure everybody understands that we’re doubling cash flow per share.”

Gulf Sale

Flores said he’d offered to buy Holstein three years ago, and was rebuffed. Today’s transaction was possible only because BP was forced by the Gulf oil spill to shed assets, the Plains CEO said.

BP is targeting $38 billion in divestitures by the end of next year to raise cash after a 2010 explosion at its Macondo well in the Gulf killed 11 workers. It’s setting aside $38 billion for costs of the disaster, including a $20 billion trust fund for victims.

Today’s transaction brings BP’s total asset sales since the beginning of 2010 to more than $32 billion, the London-based company said in a statement.

“BP’s got a good price, we were counting on them getting about $3.5 billion,” Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London, said today in a phone interview. “They’re almost done with their asset sales now.”

JPMorgan Chase & Co. (JPM) and Barclays Plc (BARC) advised Plains on the deal, effective Oct. 1 and expected to close by year-end. JPMorgan led financing by a bank group that also includes Barclays, Bank of America Corp., Bank of Montreal, Citigroup Inc. (C), Royal Bank of Canada, Bank of Nova Scotia, Toronto- Dominion Bank (TD) and Wells Fargo & Co. (WFC)

To contact the reporters on this story: Jim Polson in New York at jpolson@bloomberg.net; Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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