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Morningstar | BP Beefs Up U.S. Position With BHP Buy

BP is acquiring BHP’s U.S. onshore unconventional assets for $10.5 billion. Although the deal looks a bit pricey, it fills a hole in the company’s portfolio and opens an additional avenue of liquids growth. BP is also better suited today to manage the portfolio than it was a few years ago after separating its U.S. onshore business and improving performance. We plan to incorporate the transaction into our model, but do not anticipate a material change to our fair value estimate. Our no-moat rating remains unchanged.

With the deal, BP acquires 4.6 billion barrels in discovered resources spread across 470,000 net acres in the Permian, Eagle Ford, and Haynesville plays. The deal should improve BP’s U.S. onshore position as it adds liquids growth potential to a previously gas-oriented portfolio (currently 315 mboed in production, 8.1 billion in resources, about 85% gas). Current daily production of 190 mboed comes primarily from the Eagle Ford (90 mboed) and is 45% liquids, but BP plans to grow liquids production to 200 mbd by the mid-2020s.

Deal metrics look a bit pricey at nearly $23,000 an acre (unadjusted for current production) and $2.30/bbl for discovered resource, especially compared with the 5 billion boe in resources BP acquired in the last few years for $1/boe. Research firm Rystad places the value of the resources at $10.7 billion (assuming $73/bbl oil), implying the actual price paid is a bit expensive assuming our long-term assumption of $60/bbl oil, which when used implies a value closer to $8 billion, although that excludes the value of some midstream infrastructure. However, BP has dramatically improved the performance of its onshore U.S. operations in recent years after setting it up as a separate business unit and could operate it more effectively than BHP. As such, BP has targeted $350 million in synergies and aims to deliver other potential value-enhancing opportunities in the coming years, which could ultimately improve returns.

Furthermore, BP expects the transaction to be accretive to earnings and cash flow per share while sticking to its previous capital spending plans of $13 billion-$14 billion per year through 2021 and increasing its upstream cash flow target by $1 billion to $14 billion-$15 billion. Signaling its confidence in its future targets, BP also announced a 2.5% increase in the dividend.