BP’S swoop for BHP shale assets shows that timing is everything
How can the same asset be so highly prized by one party and so desperately unwanted by the other? That’s the riddle seemingly posed by BHP Billiton’s $10.5bn (£8bn) sale of its US shale assets to BP. For the layman, the deal’s underlying message is all about the beauty of timing. BHP spent $20bn buying up onshore shale fields in Texas and Louisiana in two stages in 2011, looking for a piece of the action in the shale gas revolution. It was a total disaster. The company’s timing was all wrong: it was battered by a sudden glut of shale gas on the market, depressing prices. It was clobbered a second time by the sharp downturn in commodity prices between 2014 and 2016, which sent crude oil to 12-year lows and put its core mining business under extreme pressure.
Operational challenges didn’t help. The company spent too much, too quickly, and lost money hand over fist.
Once capex and impairments are factored in, BHP has sunk $40bn in its shale assets. A turnaround plan kicked in three years ago, stabilising cash flows, which has yielded some $10bn, and the price agreed with BP is better than expected: indeed, timing now seems to have worked in BHP’S favour, with US shale suddenly becoming hot property again. But all told, the company is $20bn worse off because of its shale misadventure. It is a boon for the Anglo-australian miner that BP wants to take the whole package off its hands, after it had previously considered selling bits off piecemeal. At the same time, BHP has met one of the key demands of activist investor Elliott Advisors, which has campaigned for more than a year for it to flog off these fields and return the cash to shareholders.
Both sides can plausibly claim victory from the deal. They both insist the shale fields in question are top-quality assets – for their oil, rather than gas. It’s just, at the end of the day, BHP wasn’t the right owner for them. The feeling inside the miner appears to be one of mixed emotions: relief at a good outcome, but still chastened by the mistakes that were made.
So how does BP think it can succeed where BHP failed? It has assets nearby, for one thing, and says there are cost savings to be had because of that. It’s confident it can bring in its own management team and techniques to squeeze more out of what it’s buying.
The deal hands BP a greater foothold in US shale oil, balancing a
‘Both sides can plausibly claim victory from the deal. They insist the shale fields are top-quality assets’
portfolio that has been skewed more towards gas. And the Permian basin in Texas, where many of these fields are located, is in high demand. Simply put, BP believes it’s buying the right asset at the right time at the right price.
The world’s oil majors and mining giants are keen to show shareholders they have learnt discipline in the last five years, having been rocked by see-sawing commodity prices. It may be the biggest deal for BP since 1999, when it splashed $27bn buying US oil company Arco, but it is at pains to insist it is not overstretching itself.
Indeed, the $10.5bn outlay will be offset by up to $6bn of asset sales from other parts of BP’S portfolio. To further reassure investors, and signal its renewed confidence, it has announced the first rise in its dividend since 2014.
BP and BHP remain partners in a number of offshore oil ventures in the Gulf of Mexico, where much of the latter’s capital expenditure has been committed in recent years. The miner, which makes the bulk of its money from digging up iron ore in Western Australia, remains committed to offshore oil, which it has been drilling since the Sixties. It views oil as a – by and large – profitable business that differentiates it from its mining peers.
Inevitably, there is speculation that BHP boss Andrew Mackenzie will view this as a moment to step aside with a significant achievement in his back pocket. Mackenzie, a former BP executive, has been in the top job since 2013, when he was handed a brief to deliver a leaner, meaner operation.
BHP, while hardly a household name in the UK – unlike BP – is much more high-profile in Australia.
Mackenzie has endured a tough time placating shareholders such as Elliott while navigating a volatile time for the industry and managing the clean-up from the devastating Samarco disaster in Brazil of 2015.
But insiders say the Scot has a sense of unfinished business in driving a “culture change”. He has bought himself a little breathing space, putting himself on the front foot. BHP investors, with a payday finally in the offing, may be happy to have him stay.