Sign up Australia
Proactive Investors - Run By Investors For Investors

City reacts to BP’s US$10.5bn US shale deal with BHP Billiton

BP boss Bob Dudley describes it as a 'transformational' transaction - it delivers 190,000 boepd of production and over 4bn barrels in resources in the ground
oil and gas operations
UBS has a 'buy' rating and a 610p price target for BP

Analysts at UBS have described BP Plc’s (LON:BP) US$10.5bn deal with BHP Billiton plc (LON:BLT) as “an important strategic step and a good fit”.

BP this morning unveiled the transaction which will see it acquire 100% of Petrohawk Energy Corporation, the BHP sUBSidiary that holds interests in the Eagle Ford, Haynesville and Permian basin shale assets.

Together the acquired assets yield some 190,000 barrels of oil equivalent per day of production and 4.6bn barrels of discovered resources.

READ: BP strikes deal to acquire BHP’s US shales assets

UBS analyst Jon Rigby, in a note, said: "BP's existing activities in the Haynesville and Eagle Ford lend credibility to BP's synergy target (and its recent strong record in performance improvement L48 operations).

“Doing the deal provides the familiar benefits to an international major - that of short cycle flexibility - and for BP it also signals the company finally moving on from Deepwater Horizon, freely managing its portfolio.

“It clearly adds financial critical mass and visibility to BP's L48 operations. Importantly it doesn’t compromise BP's financial framework albeit via issuing equity (although we question if this is even fully executed should oil prices remain so far above BP's assumptions).”

UBS has a ‘buy’ recommendation and a 610p price target.

RBC reckons it’s a better deal for BHP

Elsewhere, RBC Capital also see it as a positive deal for BP albeit its analysts suggest it’s a better deal for BHP and suggested further acquisitions may follow.

“For BP, although we see the merits of enhancing the company’s position in the Haynesville and the Eagleford, we see greater potential synergies for other buyers in the Permian,” RBC said in a note.

“Our main contention with BHP’s Permian acreage is the checkerboard nature, limiting the ability to drill longer laterals and reduce cost. We question whether further asset level deals are required in the play to shore up and increase the concentration of acreage.”

BP to benefit from BHP’s investment

“The shale deal presents a promising opportunity for BP to reverse many years of underinvestment,” said Artjom Hatsaturjants, analyst at Accendo Markets.

“With oil prices pushing multi-year highs, the addition of unconventional oil assets in the highly-prized Permian basin could be a big win, especially after BHP Billiton already made much of the necessary investment to kick-start their upstream development.”

The analyst added: “A tough break for BHP, which had to take billions of dollars in write-down charges after 2014 oil market collapse, but BP is set to pick up the pieces on the (relative) cheap.

“Still, it comes at a price of a short-term hit to shareholder value and would divide those investors looking for a quick profit from rising oil prices and those who see a long-term opportunity in holding energy stocks.”

BP sees it as a transformational deal

The move, according to BP, will provide growth into the next decade. It is accretive to both earnings and cash flow, indeed the oil major is now upgrading its medium-term upstream free cash flow target by US$1bn, to US$14-15 bn in 2021.

As something of a sweetener for BP’s more conservative, income-focused shareholders the company also today announced its first dividend hike for some fifteen years, with the payout rising 2.5% to 10.25 cents per share for the second quarter.

"This is a transformational acquisition for our Lower 48 business, a major step in delivering our upstream strategy and a world-class addition to BP's distinctive portfolio,” said Bob Dudley, BP group chief executive.

“Given our confidence in BP's future - further bolstered by additional earnings and cash flow from this deal - we are increasing the dividend, reflecting our long-standing commitment to growing distributions to shareholders."

The deal

BP is paying a total of US$10.5bn, handing over half upon completion and a further US$5.25bn payable in six equal instalments over six months from the date of completion.

Brian Gilvary, BP chief financial officer, added: “The financial repositioning we have delivered in recent years and the confidence we have in our outlook for free cash flow allows us to take this extremely attractive opportunity now without any adjustment to our financial frame.”

The current frame sees BP expending between US$15-17bn of organic capital to 2021, with gearing of 20-30%. As such the deal is supported partially by divestments elsewhere in the BP portfolio as well as cash flow and equity raising (alongside the proposed deferred payments).

“This is fully consistent with our commitment to financial discipline and creating value for shareholders.  With our planned additional divestments and buybacks, we expect to deliver this major step forward for a net investment of around $5 billion," Gilvary said.

Seals an exit for BHP

For BHP, the transaction seals an exit from a diversification away from mining which was conceived during the ‘peak oil’ times, of plus US$100 per barrel crude.

The mining group is separately selling its other US oil and gas unit, which owns its Fayetteville assets, in a deal worth US$300mln.

“Our priority with this transaction is to maximise value and returns to shareholders,” said Andrew Mackenzie, BHP chief executive.

“In August 2017, we confirmed that we would seek to exit our US shale assets for value. Following a robust and competitive process, we have delivered on that commitment. We are pleased that we have agreed to sell all of our shale assets in two simple transactions that provide certainty for shareholders and our employees.”

"The sale of our onshore US assets is consistent with our long-term plan to continue to simplify and strengthen our portfolio to generate shareholder value and returns for decades to come.”

View full BP. profile View Profile

BP plc Timeline

Related Articles

oil well
February 14 2018
At Welch, work in recent months has focused on workovers and production optimisation.
Oil and gas workers
April 18 2018
Tapi Aike, located in the Austral basin, was one of most hotly contested blocks when it was put out to tender
Green energy
April 10 2018
PowerHouse Energy has been busy over the past year, establishing its demonstration plant in the UK, signing deals to develop a hydrogen bus, and even trialling its technology in Qatar ahead of the 2022 FIFA World Cup

No investment advice

The information on this Site is of a general nature only. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions. You acknowledge and understand that neither the Company, its related bodies corporate, the information providers or their affiliates will advise you personally about the nature, potential value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter. You should read our FSG and any other relevant disclosure documents and if necessary seek persona advice prior to making any investment decision.

You understand and agree that no Content (as defined below) published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person.

You understand that in certain circumstances the Company, its related bodies corporate, the information providers or their affiliates may have received, or be entitled to receive, financial or other consideration in connection with promoting, and providing information about, certain entities on the Site and in communications otherwise provided to you.

You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate. From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

Before you act on any general advice we provide, please consider whether it is appropriate for your personal circumstances.

© Proactive Investors 2018

Proactive Investors Australia PTY LTD ACN:132787654 ABN:19132787654.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use