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.[NLINSERT]
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Disclosures from Raymond James, BP plc, April 13, 2020
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