We think that BP plc's (BP) $10.5 billion acquisition of BHP Billiton Ltd. (BHP) onshore shale assets is transformational for its unconventional business in the U.S. The portfolio includes unconventional assets in the highly-prized Permian-Delaware basin in Texas, premium positions in the Eagle Ford shale, also in Texas, and in the Haynesville shale in Louisiana.
(Unconventional oil and gas are typically produced from sources such as oil shale, oil sands or extra heavy oils.)
This acquisition will significantly increase the liquid hydrocarbon proportion of BP's production and resources in the U.S., to around 27% of production (from 14%) and 29% of resources (from 17%). The assets purchased currently produce around 190,000 barrels of oil equivalent per day, of which 45% are liquid hydrocarbons, a very good balance between crude oil and natural gas.
The major question here is: can BP leverage their scale and competitive advantage in other regions and basins, to make it in the basins that were pioneered by the independents?
We are bullish on BP following this transaction, given that they are one of the few oil majors that has a strong presence in the U.S. unconventional resources space. The area has traditionally the domain of mid-sized private and public independent exploration & production companies. BP had exited the Permian Basin in 2010 in the wake of the Deepwater Horizon oil spill.
This transaction is also a big victory for Paul Singer at Elliot Management who, for months, was calling the Board of Directors, to divest BHP's domestic oil & gas operations to focus on its core metals and mining business. As happened with Singer's prior activist campaign with Hess Corp. (HES) , his efforts paid out.
We see this sale as positive for BHP and we have a favorable view on the stock as the company moves to reshape its strategy and continue with other non-core divestitures.
The next large unconventional divestiture earmarked for sale to keep an eye on is the Eagle Ford assets operated by Pioneer Natural Resources (PXD) . These assets are being developed in partnership with Reliance Industries of India and Grupo Alfa of Mexico (ALFAA.MX). For a long time, PXD has been considering divesting this asset as it looks to re-allocate capital back into the Permian.
We will recommend taking long positions on PXD ahead of further divestitures that would improve its balance sheet.
