Deal of the year, North America: BP

Frank Verducci, BP

Any large-scale financial transaction relies on a lot of moving parts that need to be in sync for a successful conclusion: the real test comes should, at the eleventh hour, one of those parts fail.

That was the position that Cox Oil, a privately-owned independent oil and gas company, found itself in during its acquisition last year of Energy XXI Gulf Coast, a Houston-based exploration and production company. The two parties had agreed terms in June 2018, with the board and shareholders of the publicly listed Energy XXI accepting the $322 million price for its outstanding shares on September 6.

To finance the acquisition, Cox contracted to sell forward a proportion of the production from the Energy XXI assets to a private equity firm, EIG Global Energy Partners, through a $375 million volumetric production payment. BP stepped in to provide hedging for EIG’s VPP purchase. 

However, embedded in the price Cox was to pay for Energy XXI was a commitment to Exxon – the original owner of the company’s offshore platforms and wells – to assume all future plugging and abandonment (P&A) liabilities that will be incurred at the end of those assets’ working lives. Under US law, the original owners of oil and gas assets are on the hook for decommissioning costs if their current owners go bankrupt.

That liability had been accounted for with a $200 million letter of credit (LC) from Energy XXI’s lenders to Exxon. However, with just days to go before the transaction was due to close, it became clear that the surety bonds that Cox had planned on using to cover the P&A liabilities would not be approved by Exxon in time for the acquisition to close, due on October 18.  

On the morning of Friday 12, just six days before the close, Frank Verducci, the Houston-based head of structured commodity and secured credit transactions at BP, received calls from EIG and Cox’s investment bankers. “They explained that LCs needed to be posted for the surety bonds. But multiple financial institutions [that had been approached to provide the LCs] could not get comfortable with the plugging and abandonment liabilities. Is this something BP could help with, be able to commit to and be ready to go before closing?”

As Verducci explains, BP has undertaken similar transactions. “We’ve done this in the past. However, one difference is that these were onshore assets, and they would usually take four-to-six weeks to get approval from multiple credit committees, because they represent significant liability on our balance sheet,” he says.  

“This was the first time we’d been approached for posting credit support for a producer offshore: and we had a four-day timeline.”

Working over the weekend, the team structured an LC that BP could post to Exxon to cover the exposure until the surety bonds could be approved – and pushed it rapidly through multiple investment committees.

Brad Cox, chairman of Cox Oil, says he was surprised to see an oil firm issuing this type of traditional LC facility. “I had no idea BP would be able to do something like this. This deal really did show them to be a huge competition to private equity firms and banks.”       

I’ve never seen a company of that size move as quickly. Because BP is in the industry and understands it inside out, there was no learning curve. They understood everything we wanted and were able to move really fast

Brad Cox, Cox Oil

BP’s relationship with Exxon meant that the deal team could be confident that the US supermajor would be comfortable with a 90-day LC from BP, providing a bridge until the surety bonds were in place, given the latter’s impeccable credit rating. “The combination of these factors gave comfort to both Exxon and our internal management committee – this had to go all the way to our global head of integrated supply and trading – to allow us to complete the transaction in a short time frame.”

Cox was impressed with the speed at which BP was able to move. “I’ve never seen a company of that size move as quickly,” he says. “Because BP is in the industry and understands it inside out, there was no learning curve. They understood everything we wanted and were able to move really fast.”

“We look at things differently to banks,” says BP’s Verducci. “We’re comfortable with operations in high-risk exploration and production environments. We’re able to undertake expert review of the assets that banks might have to outsource to consultants.”

Cox Oil’s chief executive, Craig Sanders, credits BP’s fast action to the company’s culture of empowerment. While approvals may have had to go all the way to the top, they were done quickly and, additionally, important decisions were made by the structurers themselves. “People were empowered to make decisions and there weren’t layers of time-consuming approvals needed,” he says. “BP has all the reach and clout of a giant organisation, but manages to make it feel nimble and personal.”

Verducci comments that, as an integrated energy company, BP’s executives have typically worked in different parts of the business, giving them a more holistic understanding of the physical, trading and financing elements of the oil and gas sector. “We were able to provide an integrated package within a short timeline because of our ability to combine global energy company, Commodity Futures Trading Commission-registered swap dealer, and provider of risk management solutions,” he adds.