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Analysts: BHP shale assets purchase to 'transform' BP's US foothold

BP PLC's purchase of BHP Billiton Group's shale assets will allow the global oil and gas major to "transform" its United States portfolio, according to analysts.

BP American Production Co., a unit of BP, will purchase Petrohawk Energy Corp., a subsidiary of the mining heavyweight that holds acreage in the Permian Basin, the Eagle Ford in Texas, and the Haynesville region in Texas and Louisiana, for $10.5 billion in cash.

BHP began looking for potential buyers for the shale assets in June. At the time, analysts at Raymond James said BP was the most likely candidate to be the winning buyer for the BHP onshore assets.

Unlike many of its peers who, in the last few years placed heavy bets on rising output and lucrative returns and dumped billions into shale investments, BP sold off most of its Permian assets in 2010 to Apache Corp. to help defray the costs of damages related to the Deepwater Horizon oil spill in the Gulf of Mexico.

BP's existing U.S. onshore oil and gas business currently produces around 315,000 barrels of oil equivalent per day from seven basins in five states with resources of 8.1 billion boe. The acquisition will boost the liquid hydrocarbon proportion of BP's production and resources in the U.S. onshore, to around 27% of production and 29% of resources, from current levels of 14% and 17%, respectively.

Through this acquisition, BP will acquire 470,000 net acres with a total current production of 190,000 boe/d. About 45% of this figure is liquid hydrocarbons with resources of 4.6 billion boe.

"BP was previously underweight to U.S. tight oil compared to its peers. This deal transforms BP's U.S. business – it will immediately raise its U.S. production by almost a fifth while providing competitive returns and volumes growth. We see BP's combined U.S. production hitting 1 million boe/d in 2020, with the potential to reach close to 1.4 million boe/d by 2025," Wood Mackenzie senior analyst Maxim Petrov said in a July 27 statement.

"The most valuable part of the package is BHP's Eagle Ford position given its scale and attractive economics. But the Permian acreage offers the biggest longer-term upside, with some of the best breakevens in the play, well below US$50/bbl Brent. Similarly, the Haynesville assets have some of the most attractive shale gas economics outside the Marcellus, and nicely compliment BP's existing acreage in the play," Petrov added.

Following completion of this transaction and the sale of BP's 39.2% interest in the Greater Kuparuk Area in Alaska, which is also expected to occur this year, BP's total U.S. production is expected to be approximately 885,000 boe/d, the company said in a July 26 news release.

The acquisition is expected to increase BP's free cash flow target from its upstream business by $1 billion, to $14 billion to $15 billion in 2021, BP's Upstream chief executive Bernard Looney said.

Once complete, the deal is expected to deliver more than $350 million of annual pretax synergies to the company. Additionally, BP intends to make new divestments of about $5 billion to $6 billion, predominantly from its upstream segment. The proceeds will be used to fund a share buyback program. The divestments will be in addition to the company's ongoing strategy to sell $2 billion to $3 billion in assets each year, BP indicated.

The BHP asset sale follows months of pressure from activist shareholder Elliott Management Corp. for sweeping changes to the mining company, including the spinoff of its U.S. shale assets.