Junaid Raza Syed (Senior Editor/Department Manager FS)
In hopes of gaining access to some of the richest acreages for drilling crude oil, UK’s oil company, BP, has decided to buy $10 billion worth of BHP’s US shale assets.
The decision comes at a crucial point in time when crude oil prices have suddenly jumped up after being at constant lows for the past few years. Many other energy companies are competing to stake a claim on US shale industry which has quickly grown to become one of the biggest and cheapest sources of oil supply in the world.
$10 Billion Acquisition
Till now, the U.S. has heavily focused on natural gas production since oil prices have been too low for profitability but now that crude oil prices are starting to rise, BP has acted upon the opportunity to regain its foothold in the country and invest in premium quality oil assets.
It has taken the UK-based oil company years to overcome 2010’s Deepwater Horizon disaster which resulted in damages worth billions of dollars. Now that the energy giant has finally found stable grounds to grow its business, it has a long way to go before catching up with rivals who are already ahead in the investment game and have claimed their stake on the US onshore business.
BHP asset purchase will become the most significant acquisition the company has made since the 2010 disaster. The newly acquired energy unit will give BP access to the rich North American oilfields including the Eagle Ford and Permian basins in Texas as well as the Haynesville region in Texas, Louisiana which is known for its abundance in oil reserves.
BHP’s most recent annual report shows that its assets are worth $14 billion in value. The company is able to produce over 190,000 barrels of oil and gas in one day. In comparison, BP’s current production is limited to 315,000 barrels in the United States.
Increasing Drilling Capacity
BP’s CEO Bob Dudley is feeling good about the deal despite the hefty $10 billion price tag. He believes that the acquisition will help the company increase its oil drilling capacity which will bring in huge profits in the future.
In fact, Dudley is so confident about the future prospects that his company has bumped up the dividends for the first time in over 3 years. BP is also planning to divest almost $6 billion worth in assets to buy back some of its shares.
The acquisition also marks the end of BHP’s reign over the US shale sector. The unit was once acquired by the Anglo-Australian miner when commodity sector was booming and oil prices had soared over $100 per barrel.
At the time, it made sense for the company to put over $20 billion in US shale but the when the commodities boom was over, BHP was no longer one of the top 10 shale producers in U.S. After the downturn in the oil market, the company lost billions of dollars in writedowns and impairments. Many oil companies even defaulted and declared bankruptcy.
Lowering Production Costs
An anonymous source working in BHP said that the expanding into the shale sector was one of the company’s biggest mistakes, but now that its assets have been sold, he’s glad that the chapter has finally closed. But as oil prices rise over $70 per barrel once again BP is eager to expand its production to oil-rich regions in the United States and reduce costs in order to maximize its profits.
According to Thomson Reuters, the fast-pace consolidation in the oil industry has led to $115 billion acquisitions in just one year. Only recently, the U.K.-based Royal Dutch Shell and Chevron waged a bidding war against BP to take over BHP’s assets in the U.S.
Senior Analyst Maxim Petrov from Wood Mackenzie says that BP’s main motivation behind the acquisition was to access the Eagle Ford position because of its vast oil reserves and attractive economics that will bring down the production cost in the future.
For the past decade, U.S. shale industry has been booming thanks to smaller oil companies’ cost-cutting techniques and innovative drilling technology, which has made the country one of the biggest shale producers in the world.
