PXP adds large debt load to enter energy big leagues in $5.5 billion deal

(Reuters) - Plains Exploration & Production Co will borrow $7 billion -- more than its market value -- to buy BP Plc's stake in some deepwater Gulf of Mexico oil wells in a $5.5 billion deal that will triple its production of crude, making it a much bigger player in the North American energy market.

Shares of Plains, known by its ticker symbol "PXP," fell nearly 10 percent as investors worried about the steep price of the deal and the debt load, which exceeds PXP's $5 billion market cap, that will fund the acquisition and other company needs.

The large network of oil exploration rigs will put Plains Exploration into the energy industry big leagues with Anadarko Petroleum Corp , Devon Energy Corp and other large independent oil and natural gas producers.

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, prices for which are at a decade low, and more on lucrative crude oil.

PXP Chief Executive James Flores touted the new assets to investors on a conference call, saying they are superior to peers' holdings in the Gulf.

"This is not your brother's Gulf of Mexico," Flores told investors on a conference call. "This has very long life and we have a well-developed plan for the next eight years."

Flores has been CEO for nine years and owns roughly 0.9 percent of outstanding PXP shares. The stock is mostly held by institutional investors, including Vanguard and BlackRock Inc .

Formed in 2002 by a tax-free spinoff from Plains Resources Inc, PXP has traditionally focused on oil drilling in Southern California.

PXP bought Nuevo Energy Inc and 3TEC Energy Corp in the first few years after gaining independence, boosting its portfolio's size and whetting its appetite for growth by acquisition. Each of those deals was for less than $1 billion, making Monday's buyout PXP's largest acquisition to date.

Plains Resources, which is heavily involved in oil and natural gas transportation, was itself bought in 2004 by Vulcan Energy, part of Microsoft Corp co-founder Paul Allen's Vulcan Capital investment fund.

The deal helps BP shed smaller, older assets to focus on a smaller number of more lucrative wells in the Gulf. 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.

In that spill, the worst-ever offshore U.S. spill, 11 people died and 4.9 million barrels of oil spewed from the mile-deep (1.6 km-deep) Macondo oil well.

DEBT LOAD

PXP executives on Monday tried to assuage investor concern about the large debt load for the deal by outlining a plan to use cash flow in 2013 and 2014 to retire borrowings.

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

PXP shares were down 9.8 percent at $36.35 on Monday afternoon on the New York Stock Exchange. In London, BP shares closed up 0.7 percent at 438.4 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 BP 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 .

PXP will also get BP's 33.33 percent working interest in the Diana-Hoover Field, which is operated by ExxonMobil Corp , 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.

Plains said it expected its production to be roughly 90 percent oil after it divests some natural gas assets it has decided to sell.

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 and Mike Erman in New York and Swetha Gopinath in Bangalore; Editing by Sriraj Kalluvila, Lisa Von Ahn, Matthew Lewis and David Gregorio)