BP Tiptoes back in a foot of Permian shale

The Legacy

BP's leverage ratio is in its target range but higher than that of its peers [19659009]] Therefore, the announcement Thursday night was filled with articles designed to appease and cajole investors. First of all, an estimate of synergies equivalent to $ 2.5 billion in terms of current value, almost a quarter of the purchase price. Second, a capital increase to cover half of the check, which will also be carried forward within six months of the end of the operation later this year. To compensate for this, BP promises another cap of disposals, most likely upstream, in addition to its existing program. BP also reaffirmed its capital expenditure budget, its return on capital target and its oil reference price of $ 55 per barrel (plus a temporary additional $ 7 discount for Permian badets due to the current constraints of the pipeline). In the end, BP increased its dividend for the first time since 2014.

As my colleague David Fickling wrote here, BHP got a good price compared to expectations, which forces the buyer to show have not paid too much. So BP is doing everything possible to show that it can afford this deal without breaking the buzzword in oil circles: "discipline". Investors in the sector are sensitive after the recent oil accident – and a decade of poor investment – Thursday's reaction to results below expectations of Royal Dutch Shell Plc has been demonstrated (despite a buyback program of $ 25 billion).

In the case of BP, it takes time to prove that this agreement makes sense and is important. break its financial framework in terms of spending, leverage and performance. On the positive side, badets are about half of the liquids, helping to reduce the weighting of lower value natural gas in BP's onshore operations from 86% to 73% of production. BP's existing positions outside the Permian Basin allow for potential synergies. Permian badets, meanwhile, are almost de rigueur for any major oil company with serious ambitions in the United States onshore. In addition, BP's post-disaster 2010 track record gives it the credibility of being able to transition from low performing to best performing badets.

The challenge, besides the usual risks related to oil prices, will be largely focused on the issue. haunt all the majors in the shale: can they make their main competitive advantage – scale – work for them in a corner of the pioneering industry by the little guys? In theory, they should be able to mature and more ambitious drilling and completion methods require more capital (and negotiating power with oil service contractors .)

BP claims to have reduces its production and development costs. its operations in the 48 most remote states by more than one-third over the past five years. This includes deflation of the accident, however, so it will be necessary to show that such savings have remained. In addition, at 83 000 acres, its Permian position is relatively small and, given the advantages of drilling under larger and contiguous areas, it is more like a launching pad at a later consolidation than at any one time. a final resting place

. To establish this anchor, a transaction of this size involving a motivated seller like BHP was probably the best opportunity that BP was likely to get anytime soon. Still, it is just as good that BP shows that it has taken into account the experiences of the buyer and the seller over the last decade.

To contact the author of this story:
Liam Denning at [email protected]

To contact the editor responsible for this story:
Mark Gongloff [19659021] to [email protected]