Hilcorp finances to stay private; ratings agencies eye debt for deal

After months of review, Alaska state regulators on March 12 granted confidentiality to Hilcorp Energy’s finances, removing a hurdle for the company as it seeks to buy BP Alaska’s pipeline assets as part of a $5.6 billion deal.

The Regulatory Commission of Alaska said the Houston, Texas-based company and its subsidiaries can keep their financial statements out of the public eye.

Hilcorp in August announced it intended to buy BP Alaska’s assets, including the company’s 49 percent stake in the 800-mile trans-Alaska pipeline, and interests in related pipelines.

The companies’ financial statements are declared to be “confidential as a matter of law,” the agency wrote in a 19-page order.

More than 200 people have filed comments with the RCA, many concerned about Hilcorp’s request for privacy.

Skeptics have expressed concern that privately owned Hilcorp, a small company compared to BP, may not have the financial capabilities to handle unexpected events such as cleanup costs for a major oil spill. They also have said the transaction involving the trans-Alaska pipeline is so important to the state’s economy that the public needs a greater understanding of Hilcorp’s finances.

Hilcorp, known for buying and reviving aging oil and gas fields, has said it has provided unusually granular details of its operations at the agency’s request.

The oil company has also cautioned that disclosing that and other financial information would hurt its competitive advantage.

The five-member commission said its interpretation of state statute prevents it from releasing the documents because they are not required to be filed with the Federal Energy Regulatory Commission.

Commissioner Stephen McAlpine was the lone dissenting member. He said the companies did not originally state, as required, that they were seeking the confidentiality protections of the statute.

“With this in mind, I believe that airing these documents publicly and subjecting the entire transaction to intense debate far outweighs the petitioners’ interest in keeping them confidential,” McAlpine said in a two-page dissent.

“Instead, Hilcorp has invited an unnecessary public relations nightmare over what may come of the lifeblood of our state. Now public scrutiny may well be based on speculation as to what the documents may or may not say rather than a complete airing of the facts as they exist,” he said.

Hilcorp and BP filed for a transfer of the pipelines assets in September. The commission will decide on that larger issue by Sept. 28, the commission’s order said.

Philip Wight, an analyst with Alaska Public Interest Research Group, which has taken a lead in questioning the deal, said the commission’s order sets a “regressive precedent.”

He said the public interest group is considering legal action to reverse the commission’s decision.

“By ruling on a murky technicality, the commission failed to do its job to protect the public interest,” Wight said in a statement. “Alaskans are being denied the information we need to be good stewards of our resources.”

Agencies eye Hilcorp debt rating

Because it is a privately owned company, little is publicly known about Hilcorp’s financial picture. For skeptics of the deal, a major question has been whether Hilcorp has the financial muscle to pull off the large acquisition without putting important obligations, such as infrastructure maintenance, at risk.

Two major credit rating agencies, Moody’s Investors Service and Standard & Poor’s, have expressed concern that the oil company will take on large amounts of debt to finance the deal.

Analysts with both agencies have described Hilcorp’s current rating as a good one. But if Hilcorp borrows too much, the agencies could downgrade the oil company’s rating. That would make it more expensive for Hilcorp to borrow money because investors will demand larger interest payments.

If Hilcorp borrows too much, it could put itself and investors at financial risk, said Jim Posey, a former commissioner for the Alaska Public Utilities Commission, a precursor to the Regulatory Commission of Alaska. (The RCA is the state agency that will decide whether Hilcorp’s finances can be kept confidential.)

“I think the rating agencies are looking at them and saying this is a big bite for them, and in an environment where oil is somewhat in decline, they’re rightfully asking, ‘What is the prospect of this investment?’” said Posey, also former general manager for Anchorage Municipal Light & Power.

Hilcorp did not respond to requests for comment for this article, including how much money it might seek to borrow to finance the acquisition.

Moody’s expressed concern about Hilcorp’s rising debt in a December report.

Hilcorp has successfully invested in mature oil fields, exploiting under-performing wells and creating diversified operations across the U.S., the report said.

“With a seasoned management team, (Hilcorp Energy) has continued to demonstrate a strong track record of replacing production and adding reserves through the drill bit and via targeted acquisitions,” Moody’s said in the report.

But the company’s debt levels rose over the past year, the report said.

While Hilcorp will grow significantly as it acquires BP Alaska’s oil production and reserves, it also has future expenses to account for, including retiring old assets, Moody’s said in the report.

“If the BP acquisition were to be mostly debt funded, debt levels … could approach $6 billion from the roughly $2.6 billion outstanding at September 30,” Moody’s said.

Hilcorp can avoid a rating downgrade by employing “a prudent mix of debt, an equity infusion, and/or alternative funding,” Moody’s report said.

Hilcorp has done well under the leadership of its billionaire founder, Jeffery Hildebrand, the report said.

“The singular control Mr. Jeffery Hildebrand wields over (Hilcorp Energy’s) operations through his ownership of (Hilcorp Energy’s) general partner is also considered in its credit profile; however, the company has prospered under his control and leadership, while maintaining a strong operating profile,” Moody’s said.

Andrew Brooks, a Moody’s analyst, said in November that the credit rating agency needed to see Hilcorp’s financial plans for the acquisition as part of its credit review of the company.

Brooks could not be reached for additional comment.

Standard & Poor’s put Hilcorp on notice of a possible ratings downgrade in August, shortly after the deal with BP was announced. A review that could lead to a downgrade will be closed once the sale is complete, perhaps late this spring, the agency said.

Ben Tsocanos, an analyst with Standard & Poor’s, said the agency has seen Hilcorp’s financial plan. The plan is not publicly available, he said.

“We were of the opinion they’d go to market around now (to borrow money),” Tsocanos said.

“In general, they are a pretty decent operator,” Tsocanos said of Hilcorp.

The Wall Street Journal reported last month that Hilcorp plans to purchase BP Alaska’s assets entirely by using debt.

But the newspaper said in that report that coronavirus fears had increased challenges for energy companies trying to borrow money. That could help put pressure on Hildebrand to contribute some of his own money to help pay for part of the deal, the newspaper reported.

Denali Kemppel, general counsel for Hilcorp Alaska, told state lawmakers on Feb. 26 that Hilcorp, with its history of acquisitions, has built relationships with a sophisticated group of banks. The company is in discussion with those banks to help determine the best plan, she said.

“We are currently still evaluating all options to finance the transaction,” she said, noting that Hilcorp has made two payments to BP for a total of $500 million, with future payments planned.

BP and Hilcorp have addressed public concerns about Hilcorp’s financial capabilities in statements filed with the Regulatory Commission of Alaska.

Hilcorp is not trying to avoid responsibility to prove it’s “sufficiently well-capitalized,” and is instead concerned that disclosing its finances will hurt its competitive advantage, the oil companies said in a document it sent to the commission in December.

The oil companies have also said Hilcorp has provided all required documents to regulators overseeing the sale.

Corri Feige, the Alaska Department of Natural Resources commissioner, has said the company has been transparent and forthcoming in providing information the state needs to oversee the transaction, including for a “stress test” to determine Hilcorp’s ability to respond to a major accident should one occur.

The oil price crash could delay Hilcorp’s plans to borrow money, said Tsocanos with Standard & Poor’s. Prices plunged more than 20 percent, amid a price war between Saudi Arabia and Russia and depressed demand due to the coronavirus outbreak.

Prices for North Slope crude fell to less than $35 a barrel on March 9, levels not seen in four years.

For now, the lower prices could make it more difficult for Hilcorp to borrow cash at favorable terms, Tsocanos said.

“I don’t think it’s realistic for them to go to capital markets with oil at $35 (a barrel), so I think they will wait for the dust to settle a little bit,” Tsocanos said.

Monday’s oil price crash eroded a large chunk of Hildebrand’s wealth, according to Tom Metcalf, a reporter with Bloomberg.

Hildebrand’s estimated wealth fell from $5.4 billion to $2.4 billion, pushing him off the list of the world’s 500 wealthiest people, Metcalf said in an email, citing calculations from the Bloomberg Billionaires Index.

03/17/2020 - 12:56pm