Soaring oil prices put BP in the pound seat, enabling it to pay cash for $10.5bn deal
BP IS gearing up to leave European competitors in the dust, at least when it comes to spending the industry’s enormous cash pile.
While Total and Equinor ASA both signalled last week they were still keeping a tight rein on spending, BP yesterday showed it was prepared to take some risks. The UK oil major reversed a plan to issue new equity to fund a $10.5 billion (R153bn) acquisition, saying instead it would probably fund the whole thing with cash.
The turnaround follows a 15 percent surge in benchmark crude prices this year, helping BP smash earnings estimates in the third quarter. Oil’s rally to nearly $80 a barrel has swelled cash reserves among producers, boosting confidence following the worst market slump in a generation. At BP, that tipped management in favour of an all-cash deal.
“The thing which has helped get us over the line is that in the last four months prices have firmed,” chief financial officer Brian Gilvary said. “We do see oil prices staying pretty firm around $70.”
BP shares soared the most in two years earlier yesterday as investors saw the sense in a cash deal. The company is committed to buying the package of US shale assets from BHP Billiton anyway, and there are fewer logistical costs from using cash than from issuing shares. Nevertheless, the move does include some risks.
In early 2019, with the cash spent, BP’s ratio of debt to equity – or gearing – could rise above its targeted limit of 30 percent. The company will dispose of as much as $6bn of assets to reduce that figure, but a separate divestment programme has seen slow progress this year.
BP has ticked off about $400 million in asset sales out of a $3bn target for 2018. Gilvary said the company is confident it will meet that goal and that it will complete the separate $6bn programme, which mostly consists of ageing onshore fields in the US.
He’s also confident that tightening global oil supplies will keep prices strong, meaning a good valuation for the assets. Investors will hope he’s right, as a fresh market slump could leave BP highly leveraged with no clear exit ramp. The kind of downturn seen from 2014 to 2016, before the Organisation of Petroleum Exporting Countries (Opec) and its allies cut production, could upend the company’s calculations.
“BP needs current Opec-led management of oil markets to prevail,” Alastair Syme, an analyst at Citigroup in London, said in a note to clients.
For the UK major, which is finally emerging from the 2010 Deepwater Horizon disaster – a catastrophe that cost it more than $65bn – a small dip in the oil price can be managed, according to Gilvary.