BP to buy BHP’s US shale assets for $10.5bn

BP has agreed to buy BHP’s US shale assets for $10.5bn in a deal the UK oil major hopes will give it access to key acreage as crude prices rebound from lows that caused years of pain for drillers and refiners.

The acquisition comes as some of the world’s biggest energy companies seek to secure US shale assets, staking a claim on a sector that has emerged as a large-scale source of relatively low-cost oil supply.

It will enable BP to gain high-quality oil assets in the US and rebalance its business in the country, which has largely been focused on gas production.

BP will be playing catch-up with rivals that made investments in the US onshore business as the UK major was focused on the aftermath of the Deepwater Horizon disaster in 2010, for which it was forced pay out tens of billions of dollars in damages.

In the largest acquisition the company has made since, BP will buy the BHP unit which holds assets in the Eagle Ford and Permian basins in Texas, among the most abundant North American oilfields — as well as the gas-rich Haynesville region in Texas, Louisiana and Arkansas. 

The carrying value of the assets in BHP’s last annual report was $14bn and they produce around 190,000 barrels of oil equivalent a day, which takes into account both oil and gas output. BP currently produces around 315,000 boe a day onshore in the US. 

Bob Dudley, BP’s group chief executive, characterised the purchase as “transformational” and said it was “a major step” in reaching the company’s goal to boost its oil drilling capacity. He added that the company was so confident in the transaction and the group’s prospects, BP would increase its dividend for the first time in more than three years.

Energy supermajors are in a sweet spot as they benefit from oil prices above $70 a barrel, even as they seek to reduce costs and rein in spending after a brutal downturn. BP is concentrating investment in areas with prolific resources and regions where it has existing production. 

US consolidation is running at the fastest pace on record, with more than $115bn of takeovers in the country’s oil and gas industry agreed this year already, according to Thomson Reuters.

Maxim Petrov, senior analyst at Wood Mackenzie, said: “The most valuable part of the package is BHP’s Eagle Ford position given its scale and attractive economics. But the Permian acreage offers the biggest longer-term upside.”

For much of the past decade, smaller oil companies have driven the US shale boom, cutting costs and making breakthroughs with new drilling technology that turned the US into the world’s fastest-growing producer.

Now oil majors that were initially slow to invest in shale are betting on such “unconventional” resources. Despite difficulties in the past with their shale businesses, cost efficiencies and better technologies have allowed companies to expand.

Bernard Looney, who heads up BP’s exploration and production business, told reporters on Friday that oil production alone should increase from 10,000 b/d to 200,000 b/d by the mid-2020s. “The deal takes us into the very heart of the most talked about oil play today,” he said.

US shale developers on the whole have struggled to generate positive cash flows, as production from wells declines rapidly. That has meant they have had to ramp up drilling in order to maintain output. But as costs have fallen and prices have recovered, oil groups now hope cash generation will improve.

BP said it would pay the $10.5bn sum in two blocks. A $5.25bn payment will be made in cash once the deal is completed. BP will then pay the remaining $5.25bn in six cash instalments over the following six months. The company plans to fund the transaction with cash on its balance sheet and the issuance of new stock. 

The deal marks a retreat from the sector for BHP. The Anglo-Australian miner acquired the unit at the height of the commodities boom when oil prices topped $100 a barrel and it bet $20bn on US shale. The deal put the miner into the top-10 shale producers in the country.

But the oil market downturn that followed led to billions of dollars of impairments and writedowns and sparked a wave of defaults in the industry. 

BHP said the sale to BP would result in a further $2.8bn impairment charge that would be taken in its 2018 results. 

BHP ultimately attracted the attention of Paul Singer’s Elliott Advisors, which had agitated for a simplification of its corporate structure. The company’s chief executive, Andrew Mackenzie, said it would return the proceeds from the sale to shareholders.

“We will confirm how, and when, at the time of completion of the transactions,” he said.

BHP is also selling its Fayetteville shale operation in Arkansas to a subsidiary of Merit Energy for $300m as it seeks to exit the US shale business, the company said on Friday.

BP added that it would divest assets worth $5bn to $6bn to fund share buybacks. 

Anjli Raval and David Sheppard in London, Peter Wells and Eric Platt in New York and Jamie Smyth in Sydney.