BP Pays $10.5B For A Second Chance At The U.S. Shale Game
With its $10.5 billion acquisition of oil and gas fields from BHP Billiton, BP is buying itself a second chance at the great American shale game.
The British supermajor largely missed the early days of the American oil revolution. Reeling from the 2010 Deepwater Horizon disaster and desperate to pay $60 billion in cleanup, fines and restitution, BP spent most of the intervening years selling $80 billion in assets.
There are a few things BP came to regret selling, like 400,000 acres in the Permian basin that Apache Corp. snapped up in 2010 for $3 billion. BP still had some 6 million legacy acres in the Lower 48, producing 300,000 bpd from places like the San Juan Basin of New Mexico and the Green River in Wyoming. But nothing in the big plays like the Bakken, Permian, Marcellus, Utica, or Eagle Ford.
To help make a second start, BP is acquiring BHP’s interests in 470,000 acres, which produce 190,000 barrels per day (of oil and gas equivalents). The breakdown includes 236,000 acres in the Eagle Ford, 83,000 in the Permian, and 190,000 in the Haynesville — with enough undeveloped land for thousands of new wells.
So is BP getting a good price? “We had our negative view piece ready to publish,” notes Oswald Clint of Bernstein Research. “However, BP’s deal mechanics are materially better than we anticipated.” Jason Gabelman of Cowen & Co. figures the deal to be worth no more than $2 per BP share. He prefers companies pursuing deals with more robust economics than the BHP assets, which produce more gas and NGLs than higher-value oil. He figures that BP is paying $3,000 an acre for the Haynesville piece, about $18,000 an acre for the Permian and Eagle Ford, and roughly $4.9 billion for the 190,000 bpd of flowing production (about $25,000 per BOE/d).
Let’s just hope BP has better luck with the assets than BHP. It feels like a lifetime ago when in 2011 BHP Billiton’s then-CEO, Marius Kloppers, caught the fracking bug and handed over $4.75 billion to Aubrey McClendon for Chesapeake Energy’s position in the Fayetteville shale gas play of Arkansas. Months later BHP quadrupled-down on its bet, paying $15 billion (a 50% premium) for Petrohawk Energy and its 1 million acres in the Permian and Eagle Ford plays in Texas. Never mind that at the time BHP—a global mining Goliath—had never fracked a single well.
Some BHP investors were nervous, but not Kloppers. “Shale gas is like coal mining,” Kloppers told me for a Forbes magazine story in 2012. “Like coal the formation is extensive, and you can programmatically and at lowest cost move through the basin and extract the gas,” he said. BHP had a decades-long time horizon and expected to learn the game in the U.S. and transfer know-how around the world. But it didn’t turn out that way. When BHP made its acquisitions, natural gas was selling at $4.25 per mmBTU and crude oil was at $100 a barrel. (Today we’ve got $2.78 nat-gas and $70 oil.) It seemed clear early on that Kloppers had overpaid. A year after the buy-in BHP wrote down the value of its shale fields by $2.8 billion and Kloppers lost his annual bonus. He resigned in early 2013.
BHP also announced Thursday the sale of its Fayetteville shale assets in Arkansas to Merit Energy for $300 million, or about $4.4 billion less than it paid just 7 years ago. “A clean exit in two simple transactions,” the company said in a statement. BHP said Thursday that it expected to record an additional $2.8 billion in write-downs on the sale. BHP had never made money on the assets because of high depreciation expense on its inflated acquisition price.
The assets will fall into the eager hands of a hungry management team. Three years ago CEO Robert Dudley decided to hive off BP’s “Lower 48” business into a wholly owned but largely standalone company, run by David Lawler. In 2016 Lawler told me he believed new drilling technology would be able to unlock oceans of cheap oil and gas even from his admittedly second-tier acreage. At the time he said he saw no need to pay up to be in the hot plays. “As the results have come in, London has been sending more money to us,” Lawler said at the time. Guess they like what he’s been doing.
Now that BP’s caught the acquisition bug again with its biggest deal since the $27 billion ARCO merger of 1999, could more deals be in the offing? For another billion or so, BP could acquire Resolute Energy (NYSE: REN), which was BHP’s partner on a chunk of acreage in the Permian. Another possibility—batted about ever since Dudley silo-ed off the business—would be for BP to spin out Lower 48 as a standalone public company.
As for BHP, with its shale adventure in the rearview mirror, the company says it intends to refocus its petroleum division on more “conventional” assets. It recently drilled successful exploration wells in the Gulf of Mexico and Trinidad and Tobago.