The Eagle Soars —
BP’s Transformative $10.5 Billion “Solid Buy”
As highlighted on July 10, a plethora of factors aligned to kick off a projected significant increase in U.S. M&A activity in the second half of 2018. In dramatic fashion on Thursday, July 26, BHP and Chesapeake announced asset sales totaling $12.7 billion to three buyers – BP, Merit Energy, and Encino Acquisition Partners. Thus, on a single day, Q3’s deal value already exceeded Q2’s total of $8.7 billion by 50 percent. As of this writing on August 13, the momentum continues and in less than half way through Q3, U.S. upstream M&A deal value tallies $17.5 billion, or over 100% above all of Q2.
Looking back to the July 26 deals, Houston-based Encino Acquisition Partners bought Chesapeake Energy’s Ohio Utica shale for $1.9 billion, Dallas-based Merit Energy snapped up BHP’s Fayetteville assets for $300 million, and BP (who recently moved its Lower 48 business to Denver) purchased the Permian, Eagle Ford, and Haynesville onshore portfolio of BHP for $10.5 billion.
BP’s $10.5 billion buy of BHP’s U.S. shale assets is hugely positive. After a long and well-publicized struggle, BP finally gets to play offense through a transformative deal that bodes well for securing its future as a major U.S. producer and opens up strategic options for the company, including a potential IPO of its U.S. business. Not only did BP strike big, our analysis indicates it did so at an attractive price. Notably, the $10.5 billion price tag ranks as the fourth largest U.S. upstream deal essentially since the beginning of the shale revolution. That list is topped by Exxon’s $41 billion XTO buy in December 2009, followed by Freeport-McMoRan’s $16.3 billion buy of Plains Resources in December 2012, and BHP’s $15.1 billion buy of Petrohawk Energy in July 2011.
Regarding the BP buy itself, most market pundits touted it as the grand entrance of BP into the Permian Basin. Indeed, BP did pick up 83,000 net acres in an over-pressured and liquids-rich portion of the Delaware Basin concentrated mostly in northern Reeves County, with key offset operators including Conoco, Anadarko, and WPX. However, we note that the acreage is largely in the condensate/wet gas window versus the oil window to the east.
Contrary to popular commentaries on the transaction, our valuation analysis indicates that the Eagle Ford is in fact the most valuable portion of the package, coming in at $4.8 billion (46 percent of the deal), followed by the Permian at $3.9 billion (37 percent), and the Haynesville at $1.8 billion (17 percent). These numbers include the value of the various packages’ existing production based on our current market multiples of $50,000/daily bbl (oil & condensate), $20,000/daily bbl NGL, and $2,250/daily Mcf. After backing out existing production, the Permian acreage does top the acquired land positions at $2.5 billion (or $30,400/acre), compared to the Eagle Ford (two packages) at $1.9 billion ($30,000/acre for Black Hawk in Karnes and DeWitt counties (core-of-core Eagle Ford) and $2,500/acre for Hawkville primarily in central McMullen County (gas window), and finally $1.0 billion for the Haynesville ($5,000/acre).
Regarding the Permian, the $30,400/acre number by our analysis appears to be a solid buy by BP. The high water mark in the Permian was recently set at $75,000/acre in the $9.5 billion all-stock acquisition of RSP Permian by Concho Resources in late March. In the Concho deal, the acreage covered core-of-core positions in both the Midland and Delaware basins. On a comparative basis, Concho picked up 62,000 boe/d and about 92,000 net acres for $9.5 billion while BP picked up 40,000 boe/d and 83,000 net acres for $3.9 billion.
The true story of the deal may well lie in the Eagle Ford where BP touts 1,400 gross drilling locations at an impressive post-tax IRR of 40-95 percent. On an apples-to-apples basis, BP touts picking up 3,400 gross locations in the Permian at roughly half the post-tax Eagle Ford IRR or 25-50 percent. In the Haynesville, BP claims 720 locations at a post-tax IRR of 15-25 percent. All the IRRs are based on $55 WTI and $2.75 Henry Hub.
Furthermore, the Hawkville area of the Permian in central McMullen and La Salle counties contains a largely contiguous block of an impressive 142,000 net acres. This gas portion of the Eagle Ford may be a sleeping giant in BP’s forward plans as Drillinginfo’s Fundamental Edge research lights up the eastern portion of this acreage block as a highly economic portion of the Eagle Ford. Also in this neighborhood, Silverbow has its Oro Grande field with type curves now at 14 Bcf EURs (1.9 Bcf/1000’ lateral) and IRRs of 60 percent based on $3.00 gas.
With this buy, BP has multiple ways of winning. Not only has it acquired immediate scale, it also has strategic optionality between basins and between commodities. BP also has the big data, technological clout, and intellectual capital to drive efficiencies and margins to the top-of-class status.
We are closely watching whether BP will be doing an encore buy – particularly related to a significant offset position to the core-of-core Black Hawk position being marketed by Pioneer Natural Resources (59,000 net acres to PXD and held in a JV with India’s Reliance) as Pioneer sheds assets to become a Permian pure-play.
For more on M&A or Fundamental Edge, please contact Drillinginfo.
Brian Lidsky, Senior Director, Drillinginfo Market Research. Prior to joining Drillinginfo, he had roles including EVP of John S. Herold, Inc., co-founder of Vigilant Exploration, and Managing Director of PLS Inc. He has extensive industry experience with particular expertise in M&A, Valuations, Market Intelligence, and Capital Markets. Brian holds a B.S. in Geology from Emory University and an MBA from the Jones Graduate School of Business at Rice University.
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