Hilcorp Energy reported steep declines for EBITDA and revenue in 3Q19, causing its bonds to soften even as investors are primarily focused on the upcoming transformative acquisition of BP’s midstream and upstream assets in Alaska, said two sources familiar with the matter. On the earnings call, management gave investors a glimpse of how it plans to finance the USD 5.6bn purchase, which will include around USD 1bn in unsecured notes, they said.

Management said on the call held 20 November that alongside the new notes, the company will finance the acquisition with a minimum of USD 500m of equity, a revolver draw and cash, two of the sources said. The deal is expected to close by 2Q20.

The USD 5.6bn purchase includes a base price of USD 4bn payable through 2020 and USD 1.6bn of additional earnout consideration after July 2021.

Hilcorp expects a USD 600m working capital adjustment to take place in its favor as the acquisition closes next year. The company will pay a deferred payment of USD 1bn to the seller in 4Q20, contingent on the performance of the asset, both sources added.

Management has a long-term leverage target of below 2.5x and intends to structure the acquisition financing to keep leverage at 3x or under, one of the sources and an additional source said.

Hilcorp’s USD 500m 5% senior unsecured notes due 2024 traded today at 88.5 to yield 7.825%, up from the 87-87.5 range the day before the earnings call, but down from the 89 area before the results were released. The notes traded at 92.5 yielding 6.7% before the acquisition announcement in August, according to MarketAxess.

The USD 500m 5.75% senior unsecured notes due 2025 traded yesterday at 87 to yield 8.63%, down from the 88-89 area before the earnings release and 94.5 yielding 6.87% before the acquisition announcement.

Investors view the BP assets as attractive at 100% oil production with a 3% decline rate, the first two sources said. Pro forma production is expected to increase to 230,000-240,000 barrels per day, compared to 150,000 in 3Q19, they said.

“This acquisition is essentially supposed to double the size of the company,” one of the sources said.

However, the existing Hilcorp entity booked negative organic earnings trends during the third quarter, with EBITDA declining 37% to USD 187m and revenue down 24% to USD 468m, two of the sources said.

For full-year 2019, Hilcorp is guiding USD 2bn-USD 2.2bn of revenue and USD 900m-USD 1bn of EBITDA, both sources added. The company expects to have USD 1.2bn-USD 1.3bn drawn on the revolver at year-end and roughly 2.9x of leverage.

As of 30 September, liquidity stood at USD 876m given USD 241m of cash and USD 635m of revolver availability, two of the sources said. Pro forma the transaction, the company expects to increase its revolver size to USD 2.5bn-USD 3bn from USD 1.7bn currently.

Total debt currently stands at USD 2.7bn, they added. With LTM EBITDA of USD 1.043bn, the company is 2.6x levered, one of the sources added.

Hilcorp did not respond to a request for comment.

2019 Debtwire