By Sarah McFarlane and Christopher M. Matthews 

BP PLC's sale of its Alaskan business is in jeopardy after a group of banks balked at financing the $5.6 billion deal to buyer Hilcorp Energy Co. amid a historic rout of oil and gas prices, according to people familiar with the deal.

A failure to complete the deal would be a blow to BP, which already has the highest debt levels -- in relation to its size -- among the major oil companies and is counting on the transaction to help reduce its debt. It is the largest deal involving oil and gas production assets globally that has yet to close, according to data provider Dealogic.

A group of banks led by JPMorgan Chase & Co. and including Wells Fargo & Co. had earlier discussed providing privately held Hilcorp with a reserve-based lending facility to help finance the deal. The proposed vehicle would essentially be a loan based on the future cash flows from oil and gas assets. But the collapse in oil prices related to the coronavirus pandemic and cratering energy demand has made the banks uncomfortable providing the loan, say the people familiar with the matter.

BP declined to comment on the deal. JP Morgan and Wells Fargo also declined to comment.

The global benchmark oil price has fallen nearly 60% this year as an unprecedented glut of crude builds while much of the global economy is closed. BP's shares are down 29% this year, in line with peers such as Chevron Corp. and Total SA.

BP and other large, Western oil companies have been using asset sales to help fund their capital expenses and dividend payments to investors for years. But the market for oil and gas assets has become virtually nonexistent, meaning major oil firms may have to take on more debt to fund their budgets and maintain investor payouts.

For BP, the deal with Hilcorp represents a large chunk of the $15 billion asset sales it aims to complete by mid-2021. The divestments should help lower the company's gearing -- the ratio of net debt to the total of net debt and equity -- which stood at 35% including leases in the fourth quarter, higher than any of its peers. This is above the company's long-term target level of between 20% and 30%.

The company said in a trading update last week that it expected the deal with Hilcorp to close by the end of this year, subject to regulatory approvals. Some analysts said that this wasn't their expectation however and that they had removed the divestment income from cash proceeds.

The Regulatory Commission of Alaska asked Hilcorp Energy on April 2 to explain whether the recent changes in financial markets have impacted its access to capital to finance the purchase of BP's assets, requesting a response by May 4.

Hilcorp management told bond investors on a call on Friday that whether the deal proceeds or not, its goal is to have things move forward on an amicable basis with BP, because they've done lots of transactions in the past and they'll continue to do business, according to a recording listened to by The Wall Street Journal.

A Hilcorp spokesman didn't respond to a request for comment.

Hilcorp's past acquisitions of BP assets in Alaska include a 2014 deal for BP's interests in four oil fields and associated pipelines.

Lenders were already pulling back from oil-and-gas companies before the current route, and the virus has only made money harder to come by. The majority of oil-and-gas companies expect their revolving lines of credit to be cut by 20% or more this spring, according to an April survey of companies by U.S. law firm Haynes and Boone LLP.

The yield on Hilcorp Energy Co.'s bonds due in 2028 was around 20% on Wednesday, up from around 6.5% in early January, according to MarketAxess, leading investors to say Hilcorp's bonds appear distressed.

"Given the current capital markets environment, financing could be challenging for the proposed BP transaction," rating agency S&P Global said in a note published on Tuesday.

S&P Global said it would be "challenging" for Hilcorp to get back the $500 million deposit it had already paid for BP's assets, even if the transaction doesn't close.

In the midst of the demand-sapping coronavirus outbreak, BP has recently pledged austerity, saying it will cut its budget by 25% earlier this month and is planning to cut costs by $2.5 billion over the next two years.

The British giant's competitors also have large divestment programs that will be challenged for the foreseeable future. Exxon Mobil Corp. has also targeted $15 billion in asset sales, which it previously said were on track. This week, Exxon said it would cut its budget for 2020 by $10 billion.

--Sam Goldfarb and David Benoit contributed to this article.

Write to Sarah McFarlane at sarah.mcfarlane@wsj.com and Christopher M. Matthews at christopher.matthews@wsj.com

 

(END) Dow Jones Newswires

April 09, 2020 09:39 ET (13:39 GMT)

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