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.
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."
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.”