BP takes gamble with shale deal

LONDON: BP is bucking the trend. Oil investors nowadays are sceptical of pricey deals that double down on hydrocarbons. The UK oil major’s $10.5 billion acquisition of BHP’s U.S. shale assets, announced on Friday, superficially ticks those problematic boxes, but is still worthwhile.

On the face of it, BP is paying up. The price is just above the $8 billion to $10 billion range that analysts had estimated assets in the Permian, Eagle Ford and Haynesville basins of Texas were worth.

And the implied value of the land is around $22,000 per acre, above the $18,632 average for recent Permian transactions, as calculated by broker Raymond James.

Still, Concho Resources offered more than $100,000 per acre in March for RSP Permian.

And BP reckons it can achieve $350 million in annual synergies given it already owns oil and gas fields in the region. Taxed at 30 percent and capitalised, these are worth $2.5 billion. That implies BP is paying $8 billion, or $17,000 per acre.

Moreover, the company thinks the $10.5 billion price tag can be achieved by discounting the assets’ future value at 10 percent and assuming an oil price of $55 a barrel. As long as crude values hover above $70 a barrel, the price looks cheaper. BP investors have two other reasons to feel sanguine.

First, the company has been underexposed to the hottest market in global oil since the sale of its U.S. shale assets in 2010.