What To Make Of Oil Giant BP’s $10B Swoop For BHP Billiton’s U.S. Shale Assets
It is official. Oil giant BP is buying $10.5 billion worth of U.S. shale assets from mining company BHP Billiton. The miner has had a troubling time managing the shale plays since it purchased them in 2011 for a whopping $20 billion.
Commenting on his company’s biggest acquisition since 1999, BP Chief Executive Bob Dudley described the move as “a transformational acquisition” and “a world-class addition” to the company’s portfolio.
So going beyond the spin, what should investors make of it? For starters, it is a massive impact statement and signal to the market that BP is putting the troubles of the Deepwater Horizon accident and the Gulf of Mexico oil spill behind it, even though it is still paying the $65 billion bill in clean-up and penalty costs resulting from the disaster.
Secondly, in pure barrels of oil equivalent terms, the acquisition will increase the company’s U.S. onshore oil and gas resources by 57%. That would be 190,000 barrels of oil equivalent per day (boepd) in additional output; 90,000 boepd from the Eagle Ford, 60,000 boepd from Haynesville and last but not the least 40,000 boepd from the Permian.
All three plays promise a quicker monetization of barrels compared to conventional offshore oil and gas plays that take years to yield. Furthermore, parts of the Permian are often deemed profitable at $22 per barrel, according to research firm GlobalData. By that argument, while the smallest in boepd terms, for me, the Permian acreage offers BP the biggest long-term upside.
Thirdly, I believe BP can make a good fist of the shale acreage that has been a problem child for BHP Billiton, as the buyer has pedigree in the business, while for the seller it was always an impulse purchase made at the height of market froth with oil prices in three figures.
Over the years, and in overtures that pre-date the 2015-2016 oil price slump, BP started a series of initiatives aimed at cost optimization and delivering projects on time. When the slump took hold, Dudley and BP’s management added another aspiration of a lower break-even.
Last year, at the World Petroleum Congress in Istanbul, Turkey, Dudley told me that he felt the age of $100 oil prices was an aberration, and that BP would be aiming to lower its break-even first to $50, then to the $35-40 range, and ultimately to $30 by 2021.
Since then, the company has been winning plaudits for its optimization drive, something that has also been picked up by the ratings agencies and industry analytics providers. Just this week, global analysis firm Rystad Energy opined that BP achieved “industry-leading” lifting costs in 2017. With relatively stable and higher oil prices, this can only get better.
Finally, the financials of the deal have irked some in the City of London and Wall Street, but I am not one of them. A big ticket acquisition it might well be, but I don’t think BP has overpaid. At the end of the day, over 50 oil majors had shown interest in buying the BHP Billiton assets, including some serious interest from Chevron, according to my sources in Houston. So the winning bid price reflects that.
The deal is expected to be completed by the end of October, and the oil giant will pay $5.25 billion in cash upon completion of the transaction. It will also sell new shares to finance the remainder. Subsequently, BP plans to buy back the new stock “over time” by selling $5 billion to $6 billion of assets.
According to the company, the first payment will result in a marginal increase of its gearing, or debt-to-capital, ratio. However, this will “remain” within BP’s 20% to 30% target range, according to Chief Financial Officer Brian Gilvary and should not be a matter for concern.
And as a sweetener for shareholders, BP said it would lift its dividend by 2.5% in the second quarter; the first such increase since 2014.
Overall, there is little not to like about this deal, especially the Permian acreage; a shale play with the most inventory in the hands of a company making waves for its lower lifting costs.