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BP sambas up with Devon Deal
News Articles | Wall Street Journal | Matthew Curtin | March 11, 2010
Read the full article on the originating site
BP’s all-cash $7 billion purchase of international assets from Devon
Energy is the oil major’s biggest transaction since the formation of
its $8 billion joint venture with Russia’s TNK in 2003. The deal
barely budges BP’s short-term production profile, unlike ExxonMobil’s
acquisition of gas producer XTO. Nor have the assets come cheap.
But the promise of a relatively high-margin boost to output from 2015,
making BP’s long-term production forecast of 1% to 2% annual growth
look more credible, should underpin BP’s rating.
The catalyst for the BP deal is Devon’s strategic refocus on
developing onshore gas reserves in the U.S., where it is among the
companies leading the shale-gas revolution in the domestic energy
sector. That makes the Oklahoma company a seller of deep-water assets.
The deal gives BP a foothold in Brazil, home to the biggest offshore
oil discoveries in the Americas since the 1970s but now off-limits to
foreign companies. Among the Brazilian assets BP has acquired are
blocks in the Campos basin, where three discoveries suggest oil fields
of at least 500 million barrels each. The nearby Santos basin,
operated by Brazil’s Petrobras, may hold as much as eight billion
barrels of oil.
BP also consolidates its position in the U.S. Gulf of Mexico, where it
is the biggest producer, and Azerbaijan, adding future production in
areas it knows well. Part of the transaction involves the $500 million
sale of undeveloped oil sand leases in Canada to Devon. Devon is
better placed to exploit the resource with a nearby project up and
running. The oil-sands joint venture will also supply oil to BP’s
Whiting refinery just south of the Canadian border, which from 2012
will be to handle heavy crude.
But BP seems to be paying a full price considering that Devon has
raised more than it expected from planned asset sales largely thanks
to the BP deal. Devon had penciled in proceeds of $4.5 billion to $7.5
billion back in November and had since raised $1.3 billion. BP gains
only 40,000 barrels of extra daily production compared with total
current output 3.8 million barrels. And the deal pushes net debt up to
33% of equity from 26%. BP says the new production will have
above-average profitability.
Ultimately the test will be whether BP does get the boost in output it
expects. But it is in deep-water offshore exploration and production
where BP’s competitive edge lies.
Write to Matthew Curtin at matthew.curtin@dowjones.com
Tagged with: bp whiting, wall street journal, refinery
