‘This is a significant moment for BP – it is the largest acquisition we have made in almost 20 years,’ – BP chief executive Bob Dudley.
BP has struck a landmark deal to catch up with its rivals tapping oil and gas in the US after recovering from the Deepwater Horizon oil spill. The oil giant has been held back since the crisis in 2010 but with the total cost nearing $70 billion, BP knows it is over the worst of it and is now making up for lost time.
BP is purchasing virtually all of BHP Billiton’s onshore oil and gas business in the US for $10.5 billion, outbidding rivals including Royal Dutch Shell and Chevron to capture a group of producing assets spread across three basins. The move will be a major boost in BP’s efforts to close the gap after falling behind in the race for acreage in the US, as higher oil prices and better technology spark an aggressive competition amongst oil majors that had previously invested only limited amounts in US shale.
For BHP, the sale will hopefully draw a line under the tensions with some of its shareholders, led by activist investor Elliot Management, who convinced the company to place its oil and gas assets up for sale late last year after arguing it didn’t fit into its primarily mining-focused portfolio.
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BHP vowed to be patient and ensure it got the right price, but having bet big on US shale by spending $20 billion on the assets when oil prices were riding high at $100 a barrel, and the fact the assets carried a value of almost $14 billion, questions may remain over the deal itself. BHP plans to return the proceeds of the deal to shareholders, with a decision on how expected shortly. However, some have argued that BHP’s decision not to reinvest the funds shows there is a lack of compelling mining opportunities for the company (and possibly the wider industry) to pursue.
BP spends $10.5 billion to catch up in race for US shale?
BP hopes to close the deal by the end of October, when it will pay $5.25 billion in cash up front, with the remainder deferred over the following six months.
Importantly, BP intends to fund the deferred consideration by raising equity, which it then intends to offset by buying back shares using the money it makes from selling off more of its own upstream assets.
The company is already running a programme that is seeing $2 billion-$3 billion of assets being sold off each year, and this will continue going forward. But following the BHP deal the company intends to significantly reform its upstream portfolio by selling an additional $5 billion to $6 billion worth of operations.
The cash generated from these additional asset sales will be used to conduct share buybacks, repurchasing stock to counter the shares it will issue to raise the funds to pay the deferred half of the total consideration. BP has continued with its existing share buybacks, having bought $200 million worth of stock in the first six months of 2018.
However, the firm has said that it may look to fund the deferred consideration another way, if a window of opportunity presents itself during the six months after the deal is completed, boasting of its flexibility. One possible alternative that BP could consider is utilising the 1.5 billion shares that it has stashed away in its treasury that it could sell to the market. Still, some wonder why BP doesn’t turn to short-term debt to bridge the gap between buying BHP’s assets and selling off others, but the company has admitted that it is looking to make the additional $5 billion-$6 billion of divestments over time. This suggests that it is either being patient to squeeze out the maximum value or is not overly confident about how long it will take to offload them.
BP hikes dividend for first time in nearly four years and prepares for share buybacks
Following BP’s positive interim results, days after announcing the BHP deal, BP’s chief financial officer Brian Gilvary said BP was ‘hitting that sweet spot’ with investors. After almost four years of dealing with stagnate dividend pay-outs while some of its competitors grew shareholder returns, BP investors have finally been rewarded.
To demonstrate its confidence behind its new assets and the prospects they offer, BP raised its second quarter (Q2) dividend by 2.5% to 10.25 cents, representing the first lift in 15 quarters. With buybacks already in the pipeline, shareholders finally have a reason to get excited about growing returns from BP, especially as the company said it would even consider ‘further buybacks’ should the business find itself sitting on surplus cash.
BP and Lower 48: building US onshore production and improving product mix
‘In a move that will upgrade and materially reposition its US onshore oil and gas business, BP has agreed to acquire a portfolio of world-class unconventional oil and gas assets from BHP. The acquisition will bring BP extensive oil and gas production and resources in the liquids-rich regions of the Permian and Eagle Ford basins in Texas and in the Haynesville gas basin in Texas and Louisiana,’ – BP.
BP plans to integrate its new assets with its existing operations onshore the US. BP separated its onshore US business four years ago and named it ‘Lower 48’ in the hope it could improve at a quicker rate after discovering independent drillers that have long dominated the US shale space were extracting resources far more efficiently.
Lower 48 has made significant progress in its time, having slashed the cost of both production and development by over one-third with less than half the amount of employees.