Analysts from major banks said BHP Billiton Group selling its U.S. unconventional oil and gas assets to BP PLC for US$10.5 billion allows it to move on from an episode best left in the past, but one independent analyst who has compared the prices achieved per acre to the going rate when the Australian miner bought them said it has come off much worse.
BHP announced July 27 it had entered into agreements to sell its entire interest in the Eagle Ford, Haynesville and Fayetteville shales and Permian Basin onshore U.S. oil and gas assets for a combined US$10.8 billion, payable in cash, a deal that BP said would "transform" its own onshore oil and gas business.
BP will buy Petrohawk Energy Corp., the BHP subsidiary that holds the Permian, Eagle Ford and Haynesville assets, for US$10.5 billion. BHP's Fayetteville units BHP Billiton Petroleum (Arkansas) Inc. and BHP Billiton Petroleum (Fayetteville) LLC will go to Merit Energy Co. unit MMGJ Hugoton III LLC in exchange for about US$300 million.
As BHP's net debt is toward the lower end of its US$10 billion to US$15 billion target range, the company expects to return the net proceeds from the deals to shareholders, and CEO Andrew Mackenzie said the sale will help the company "simplify and strengthen" its portfolio to generate shareholder value and returns for "decades to come."
The returns from the transactions are likely to come either via dividends or a share buyback.
UBS Mining Analyst Jade Little said that in May, UBS did valuation work on the basis that the sale would go for US$10 billion and the returns would go to shareholders via a buyback in 2019. This represented 9% EPS accretion.
Little told S&P Global Market Intelligence that the sale was above market consensus of between US$8 billion and US$10 billion and allowed BHP to "focus on what they do well."
Little said it is "one less distraction they need to have," especially considering the diversified miner spent US$40 billion on the U.S. unconventional onshore oil and gas assets, including acquisition and CapEx costs, since BHP entered onshore U.S. oil and gas in 2011, and cash flows from them have been "mostly negative" since, with the exception of fiscal 2017.
"BHP is known for having Tier 1 assets which they execute well, like coal, copper and iron ore, so it makes sense to move on from these oil and gas purchases [in the U.S.]," Little said.
A former investment banker from a major bank who covered BHP and had valued its U.S. unconventional oil and gas assets at about US$10.5 billion also told S&P Global Market Intelligence that it was best for the Australian company to "move on" from a "poorly executed mistake."
"The problem with those assets was that every time they had to report, they'd have to report minimal, or lack of, cash flows, and investors were wondering where the returns are for the US$40 billion they spent," he said.
Deal metrics not so great
Independent analyst Peter Strachan told S&P Global Market Intelligence that BHP came off "much worse" when comparing the price the miner will receive for the assets per acre now, with deals done when oil prices were over US$100/barrel in 2012.
Strachan said BHP had effectively sold its assets for US$55,000 per flowing barrel of oil equivalent per day, which equates to $19,962 per acre, whereas Aurora Oil and Gas Ltd. received more than four times that amount — over $81,000 per acre — for its Eagle Ford shales when Baytex Energy Corp. bought the ASX-listed company for C$2.6 billion in 2014.
"The US$300 million BHP is getting for Fayetteville — the first thing they bought — equates to US$8,120 per flowing barrel of oil equivalent, or $1,119 per acre, as it's mostly gas; whereas the going rate in 2012 was about US$175,000 per flowing barrel of oil equivalent per day, and some people were getting even more," Strachan said.