A financing that was rescued at the eleventh hour by a conventional letter of credit (L/C) has been declared deal of the year for North America at the Energy Risk Awards 2019.

The deal involved privately owned independent oil and gas company, Cox Oil, and its acquisition of Houston-based exploration and production company, Energy XXI Gulf Coast.

End-of-life liabilities

Embedded in the US$322 million price tag agreed by the two companies was a commitment to the oil major Exxon - the original owner of Energy XXI's assets - to assume all future plugging and abandonment (P&A) liabilities that will be incurred at the end of those assets' working lives.

Until surety bonds could be obtained those liabilities were going to be financed by a US$200 million L/C from Energy XXI's lenders to Exxon. But at the last minute it became clear that the surety bonds Cox had planned on using to cover the P&A liabilities would not be approved by Exxon in time for the acquisition to close on time.

BP support

Six days before financial close, Energy XXI's and Cox's investment bankers contacted another oil major, BP, to explain that new L/Cs needed to be posted for the surety bonds but they had been unable to find any financial institution prepared to accept the P&A liabilities.

BP agreed to Energy XXI's and Cox's request for the oil major to post credit support the P&A liabilities. It would usually take BP four-to-six weeks to get approval from multiple credit committees for this type of financing.

But in this instance the parties worked over the weekend to structure an L/C 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.

Risk understood

Brad Cox, chairman of Cox Oil, was surprised to see an oil firm issuing this type of traditional L/C 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," he said.

"Because BP is in the industry and understands it inside out, there was no learning curve," he concluded.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.