News

(Reuters) – Plains Exploration & Production Co (PXP.N) is paying $5.55 billion for BP Plc’s (BP.L) stake in some deepwater Gulf of Mexico wells, a deal that boosts its power in the North American energy market and sharpens its focus on crude oil.

Shares of Plains, commonly known by the stock exchange symbol “PXP,” fell more than 8 percent, however, as investors were wary about the price of the deal and the $7 billion in debt that will fund it.

By buying such a large network of oil exploration rigs, Plains Exploration is effectively jumping into the energy industry big leagues with Anadarko Petroleum Corp (APC.N), Devon Energy Corp (DVN.N) and other large independent oil and natural gas producers.

The company was spun off from privately held Plains Resources Inc in 2002 and had previously focused much of its attention on oil drilling in Southern California.

Roughly two-thirds of PXP’s operations will now be in the Gulf, with one-third on land, and daily production will triple to 300,000 barrels of oil equivalent per day. The deal is part of the company’s strategy to focus less on natural gas, whose prices are at a decade low, and more on lucrative crude oil.

“This is not your brother’s Gulf of Mexico,” PXP Chief Executive James Flores told investors on a conference call. “This has very long life and we have a well-developed plan for the next eight years.”

The move helps BP shed smaller, older assets to focus on larger, newer wells that are more lucrative. It also helps the company reach its goal of raising $38 billion from asset sales to pay for damages from the massive 2010 oil spill in the Gulf of Mexico.

Eleven people died and 4.9 million barrels of oil spewed from the mile-deep (1.6 km-deep) Macondo oil well in by far the worst offshore U.S. oil spill.

DEBT LOAD

The deal pushes PXP’s debt load above the company’s roughly $5 billion market cap. Executives tried to assuage investors by outlining a plan to use cash flow in 2013 and 2014 to retire its borrowings.

The company will hold some of the $7 billion in debt as cash and is not issuing new stock.

PXP shares were down 8.1 percent at $37.06 on Monday morning on the New York Stock Exchange. In London, BP shares were up 0.9 percent at 438.8 pence.

The final price tag was “significantly higher than we expected,” RBC Capital Markets wrote in a research note. Last month the brokerage had estimated the assets to be worth about $2.2 billion.

TPH Energy Research said the deal was good news for BP as it looks to move beyond the 2010 oil spill.

“A reduced and more-focused exposure to the Gulf of Mexico is welcome for BP, we think, in the midst of recently escalated” legal action by the U.S. government against the company for the spill, TPH said in a research note.

The properties that Houston-based PXP is acquiring were producing an estimated 59,500 barrels of oil equivalent net per day at the end of July.

PXP is buying London-based BP’s 100 percent stake in the Marlin, Dorado, and King and Horn Mountain fields. It said it would also pay $560 million to acquire the remaining 50 percent working interest in the Holstein Field from Royal Dutch Shell Plc (RDSa.L).

PXP will also get BP’s 33.33 percent working interest in the Diana-Hoover Field, which is operated by ExxonMobil Corp (XOM.N), and BP’s 31 percent stake in the Ram Powell field, which is operated by Shell Offshore Inc.

The platforms at the wells are roughly 10 years old and have successfully weathered several storms, Flores said.

PXP plans to hedge up to 90 percent of oil production through 2015 to lock in current prices and guard against a drop from current levels of around $100 per barrel, executives said.

The company, which sold natural gas assets in Texas for $785 million last November, said it expected the BP deal to close by the end of the year.

A source told Reuters on Sunday that BP was in talks to sell some of its Gulf of Mexico oil fields to PXP.

(Reporting by Ernest Scheyder in New York and Swetha Gopinath in Bangalore; Editing by Sriraj Kalluvila, Lisa Von Ahn and Matthew Lewis)