The Great Asset Dump Continues

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As we watched the flames rise up and rage, our hearts sunk with the sadness knowing lives were lost that day.  When we saw the platform sink into the deep blue sea and the black plume take its place our saddened hearts began to become enraged at how this could be allowed to happen.  With each passing day we watched and we waited for a solution to stop the seemingly unending flow of environmental and economic destruction. 

Even though the BP (NYSE: BP) oil spill has been put behind us, its effects still linger on.  Just as the oil giant had a gushing hole in the ocean floor to plug, the spill created an equally large gushing hole in their balance sheet that’s taken even longer to repair.  Recently the company announced it was selling $5.5 billion worth of oil assets in the deep water of the U.S. Gulf of Mexico to Plains Exploration and Production (NYSE: PXP).

BP has been selling assets at an unrelenting pace this year.  A few weeks ago they announced a deal for their Carson refinery in California to Tesoro (NYSE: TSO) for $1.18 billion plus another $1.3 billion for the inventory.  They’ve also unloaded two separate onshore fields to Linn Energy (NASDAQ: LINE) for just over $2.2 billion.   In each of these sales they buyers were acquiring fantastic operating assets that fit in well with their existing portfolio of assets. 

In Tesoro’s case they acquired a refinery that was just separated by a fence from their own refinery.  They also will be able to acquire significant assets that could be dropped down into their MLP. For Linn, they were acquiring assets right in the core of their operating expertise.  These are long-life, low decline rate assets with plenty of upside from future drilling locations.  BP needed cash and these willing buyers had the capital to make a deal.

In the latest deal with Plains, BP is selling three operated and two non-operated oil rich assets.  Like the assets they sold to Linn these are more mature assets that no longer fit within BP’s growth driven portfolio.  In the Gulf this means that they will concentrate their $4 billion a year capital budget on their four major operated and three non-operated hubs in the deep water.  Additionally, they’ll be spending on exploration and appraisal opportunities in the Gulf.

For Plains this is a transformational deal which has them acquiring a total of $6.1 billion worth of assets when combined with also announcing they’ll be buying out Shell’s 50% interest in one of the BP fields.  Plains had an enterprise value of around nine billion before the deal was announced so they’ve grown the company by two thirds in one day.  What’s more is that they’ll double their $1.7 billion in cash flow.

In order to pay for such a large addition they’re taking on $7 billion in debt to fund the purchase and to provide liquidity.  From there they’ll sell off about two billion in low margin non-operated natural gas assets and then over the next three years they’ll use their substantial cash flows to reduce their debt load.  Their plan is to take their debt to capitalization ratio from 72% to a more comfortable 40% by the end of 2015. 

This is a fantastic deal for Plains as it speeds up their transition to being an oil focused company.  The cash flow from their other oil properties enable them to make this deal happen without the need to issue equity.  As they use their cash flows to pay down debt, that'll shift the balance to the equity side of the balance sheet. 

The risk that cannot be overlooked is that they are significantly increasing their leverage which has backfired for others in the past.  However, they've hedged out their production at favorable prices which should go a long way in keeping this risk at bay.  Plains shares dropped about 10% when the deal was announced meaning that long term investors should be intrigued by the buying opportunity from the value creation they have the potential to drive over the next few years.  As debt comes down their shareholders should be greatly rewarded. 

This is a great deal for Plains and just another in a long line of deals BP was forced to make.  However, as they continue to repair their balance sheet and focus on growing the company it will enable them to become a more focused company.  Still, Plain's continued focus on oil and the economics of this deal make them a clear winner in the continuation of BP's asset dump. 

latimerburned owns shares of Linn Energy, LLC. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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