Largest upstream M&A since March 2017

BHP (ticker: BHP) has finally found a buyer for its U.S. shale assets, as the company today announced BP (ticker: BP) will purchase most onshore U.S. properties. BP will pay $10.5 billion for BHP’s properties in the Eagle Ford, Permian and Haynesville.

This sale will be the largest oil and gas M&A deal since Marathon acquired Andeavor for $23 billion in April, and the largest upstream deal since ConocoPhillips sold much of its Canadian for $13.3 billion in March 2017.

BHP announced its intention to sell its onshore U.S. oil and gas business in August 2017, after a long campaign by activist investor Paul Singer. BP was the established front-runner for the deal, and many market watchers predicted the company would pay about $10 billion for the assets.

BP is acquiring assets in three basins, the Permian, Eagle Ford and Haynesville

BHP owns about 83,000 acres in the Permian, mostly in Reeves County, TX. This is one of the larger positions in the play, with extensive opportunities for further development. BP estimates there are 3,400 gross drilling locations on the acreage, though it does not mention what benches and densities are included in this assumption. 3,400 wells will take a long time to develop, BP estimates this represents over 240 rig years. Even Concho Resources, which has accumulated over 640,000 acres in the Permian and has the largest drilling program in the play, would take almost nine years of drilling to develop these locations.

BP Buys BHP’s U.S. Shale Position in $10.5 Billion Deal

BHP’s Eagle Ford position is likely the most valuable position of the three, as the company holds 194,000 acres in the play. This asset is currently producing 90 MBOEPD, 70% of which is liquids, giving it a large production base. BP already has extensive operations in the Eagle Ford, so this asset should merge well with the company’s existing experience. BP estimates wells in the basin have post tax IRRs of 40% to 95%, making development very attractive.

BP Buys BHP’s U.S. Shale Position in $10.5 Billion Deal

BHP’s Haynesville position is the most mature of the three, with only 720 remaining drilling locations. Like in the Eagle Ford, BP already holds acreage in the Haynesville. BHP’s position is significantly larger, though, and this acquisition doubles BP’s Haynesville production and more than triples its acreage.

BP Buys BHP’s U.S. Shale Position in $10.5 Billion Deal

Valuing deal is complicated

Breaking out valuations for this deal is difficult, as the Permian, Eagle Ford and Haynesville assets are at different portions in an asset’s life cycle. The Haynesville, for example, was likely valued primarily based on production, as there are only 720 gross drilling locations on the acreage acquired. Most of the value paid for the Permian was likely for the position’s undeveloped potential. While the asset is already producing 40 MBOEPD, there are 3,400 drilling locations available. The Eagle Ford can likely be valued through both established production and undeveloped opportunities, as BHP’s assets in the play are producing 90 MBOE and have 1,400 drilling locations.

Viewing the transaction as a whole, BP acquired 471,000 acres and 190 MBOEPD. The purchase price of $10.5 billion means BP paid an unadjusted $22,300 per acre. If total production is valued at $35,000 per flowing BOE, BHP paid an adjusted $8,200 per acre.

BHP will return proceeds to shareholders

BP will pay the $10.5 billion in cash, split between several payments. Half, $5.25 billion will be paid immediately upon completion of the transaction, while the remining 50% will be paid in six installments over the next six months. BP will finance the first payment using cash on hand, while the remaining installments will be financed through equity offerings.

BHP reports that its current net debt is at the low end of its target range, so the proceeds from the sale will be returned to shareholders. The precise means for returning $10.5 billion to shareholders will be announced when the transaction closes. BHP will take an impairment of $2.9 billion on the sale.

Bob Dudley, BP CEO, commented “This is a transformational acquisition for our Lower 48 business, a major step in delivering our Upstream strategy and a world-class addition to BP’s distinctive portfolio. Given our confidence in BP’s future – further bolstered by additional earnings and cash flow from this deal – we are increasing the dividend, reflecting our long-standing commitment to growing distributions to shareholders.”

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