BP To Buy US Shale Assets From BHP for $10.5 Billion

BP ends a year of speculation as to who will buy BHP Billiton’s much-coveted US unconventional business, transforming its Lower 48 portfolio in the process.

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BP PLC has agreed to acquire almost all of BHP Billiton Ltd.’s US unconventional business for $10.5 billion.

The deal calls for BP American Production Co. to buy 100% of the issued share capital of BHP’s wholly-owned Petrohawk Energy Corp., which owns 470,000 net acres in the liquids-rich regions of the Permian Basin and Eagle Ford Shale of Texas and in the Haynesville Shale of Texas and Louisiana.

Melbourne-based BHP last year stated its intention to sell its US onshore business amid shareholder pressure, spurring interest from a bevy of companies including majors, big US independents, and private equity. BHP entered US shale earlier this decade through about $20 billion in deals for Petrohawk and assets from Chesapeake Energy Corp. but took huge impairment charges during the plunge in commodity prices.

The package encompasses production of 190,000 BOE/D, of which 45% is liquids, and 4.6 billion BOE in discovered resources. Once the deal is complete, expected by the end of October, liquids will become 27% of BP’s total US onshore production and 29% of its total US onshore resources, up from 14% and 17%, respectively.

The assets to be acquired break down as follows:

  • Permian: 83,000 acres with 3,400 gross drilling locations in the liquids-rich Delaware Basin in West Texas. BP says multiple zones provide a deep, economic inventory for future drilling. Current production is 40,000 BOE/D, of which 70% is liquids. The deal marks BP’s return to the Permian after it exited the basin in 2010 through a $3-billion sale to Apache Corp.
  • Eagle Ford: 194,000 acres with 1,400 gross drilling locations in both the liquids-rich Karnes Trough and Eagle Ford wet gas window in South Texas. BP notes cost reduction opportunities through synergies with existing operations. Current production is 90,000 BOE/D, of which 70% is liquids.
  • Haynesville: 194,000 acres with 720 gross drilling locations in East Texas and Louisiana. BP says the additions will double its existing Haynesville production, more than triple its acreage position, and provide opportunities for economies of scale. Current production is 60,000 BOE/D, all gas.

The companies holding the remainder of BHP’s US unconventional assets, BHP Billiton Petroleum (Arkansas) Inc. and BHP Billiton Petroleum (Fayetteville) LLC, will be acquired by MMGJ Hugoton III LLC, a subsidiary of Dallas-based Merit Energy Co., for $300 million.

Eagle Ford Value, Permian Upside

The move “transforms” BP’s US business, as it was “previously underweight to US tight oil compared to its peers,” said Maxim Petrov, senior analyst at Wood Mackenzie.

“The most valuable part of the package is BHP’s Eagle Ford position given its scale and attractive economics,” he said. “But the Permian acreage offers the biggest longer-term upside, with some of the best break-evens in the play well below $50/bbl Brent. Similarly, the Haynesville assets have some of the most attractive shale gas economics outside the Marcellus and nicely complement BP’s existing acreage in the play.”

The consultancy now forecasts BP’s combined US production to reach 1 million BOE/D in 2020, with the potential to reach close to 1.4 million BOE/D by 2025. BP’s current US Lower 48 onshore business, established as a separate unit with new management 4 years ago, produces 315,000 BOE/D with resources of 8.1 billion BOE from seven basins.

David Lawler will remain chief executive officer of the Lower 48 business.

BP estimates the combination will result in more than $350 million of annual pre-tax synergies through cost reductions and commercial and trading opportunities. The company’s free cash flow target from its upstream unit will increase by $1 billion to $14–15 billion in 2021.

Following completion of the deal, BP plans to divest an additional $5–6 billion, mainly from its upstream segment, in an effort to fund a share buyback program. This will be added to its current program to divest $2–3 billion/year.

Wood Mackenzie expects BHP to continue focusing on its core oil and gas assets in Australia and the deepwater Gulf of Mexico.