Two big deals came across the wire this morning, a restructured offer from Glencore to merge with miner Xstrata, attempting to salvage what looked like a dead deal, and the $5.5 billion buy of Gulf of Mexico assets by Plains Exploration (PXP) from BP (BP).
In the wide scope of financial news, the Glencore deal by far outstrips the other in importance and is worthy of mountains of words. But it is the Plains/BP deal that delivers something actionable -- today -- so let's go there instead.
Understanding the Plains Exploration buy of non-core Gulf of Mexico assets is pretty easy from both parties, but you'd need to know both motivations to understand the trade. For BP, this continues a five-year long process begun in late 2010 to monetize assets and put their balance sheet back in order in the face of what has been a brutal cost for the Deepwater Horizon disaster in the spring of 2010. Besides the Federal fund of $20 billion delivered to Ken Feinberg and further legal costs from complainants who have chosen not to avail themselves of that route, BP spent billions on clean-up costs and public relations efforts. Last week, the hope that BP might at least find a reasonable deal from the DoJ on liability claims from the government were dashed, pushing the possible fines up from $15 billion to perhaps as high as $25 billion.
Liability uncertainty has been an anchor around BP's neck for two years and will continue to be as further non-core asset sales continue.
As for Plains, it is trying to complete what has become a fairly standard plan inside the independent E+P energy community and move from what was a fairly dedicated natural gas producer into a company more and more committed to the production of crude oil. At the end of last year, Plains took a very substantial hit in share price as natural gas prices slid and as restructuring costs hit its third-quarter results hard.
Its sale of Granite Wash assets to Linn Energy (LINE) in November for $600 million signaled that Plains was going to concentrate on their Gulf of Mexico assets that were dominated by crude production, CEO James Flores has indicated that he'd like to see the company deliver more than two-thirds of its production in crude by 2015 and in a Reuters report from early in the year even felt that more stringent permitting in the Gulf of Mexico was a good sign for "top" companies, in which he obviously includes his own.
It's a big buy. In a company with less than a $5 billion market cap, many would say that purchasing another 5.5 billion in assets is a big bite to swallow and a lot of debt to leave on the books.
The market clearly thinks so, too. Plains is down more than 8% today, selling close to $37 a share as of this writing.
So, you probably figured out I am going to recommend this as an opportunity, but I will give this stock another day to swallow the news. Plains was a tremendous opportunity when their Granite Wash assets were sold and the company began their transition -- at that time, shares were under $25 and analysts (and the market) hated them then, too. The question is whether you believe that the Gulf of Mexico is as exciting a prospect for deepwater production as the onshore oil plays using hydraulics and horizontal techniques, like Eagle Ford, are.
I certainly do. By all accounts I read, Plains carefully chose which of the BP assets to buy and secured a very reasonable price per reserve barrel. Despite the heavy debt, it should work well.
That is, if you believe that oil will stay above $80 a barrel and the GoM remains a great American production opportunity. I do.