BHP Billiton Ltd.’s (NYSE: BHP) decision to bow out of U.S. shale plays in the Delaware Basin, Eagle Ford and Haynesville opens the door to E&P treasure hunters looking for deals in a portfolio that, by some estimates, could be worth up to $22 billion.
Some analysts, however, see the value of the oil and gas portfolio at less than one-fifth of what it once was.
Bowing to pressure from activist investors, the world’s largest mining company did an about-face on Aug. 22—saying it considers its onshore U.S. assets noncore and is actively pursuing options to exit the positions.
“In the meantime, we will complete well trials, acreage swaps and access midstream solutions to increase the value, profitability and marketability of our acreage,” the company said.
BHP follows, somewhat reluctantly, the path of other large conglomerates such as Freeport McMoRan Inc. (NYSE: FCX), which has divested Gulf of Mexico (GoM) and California assets in the past year. It also opens the door to the sale of roughly 840,000 acres, some in the best tight oil and gas basins in the U.S.
“We have also seen increasing signs that the conglomerate business model is fundamentally flawed,” Jon Weintraub, research analyst at Wood Mackenzie said. "Investors are pushing companies to focus on core competencies and divest assets of marginal value.”
BHP shares rose 1.2% to $41.41 after announcing plans to monetize its onshore U.S. shale assets, Baird Energy Research said Aug. 23.
In the Delaware Basin, BHP’s 105,000 net acre position will be the “crown jewel for potential suitors,” Tudor, Pickering, Holt & Co. (TPH) said in an Aug. 22 report. The assets sit in checkerboard fashion with Anadarko Petroleum Corp. (NYSE: APC) and Royal Dutch Shell Plc (NYSE: RDS.A).
In North Reeves County, Texas, Anadarko is the “logical buyer given midstream needs of this gassier acreage and its hefty cash balance,” TPH said.
“The company’s 200,000 net acres in the Haynesville also sits in the right zip code” in Louisiana’s DeSoto, Bossier, Caddo and Red River parishes, TPH said. “Operators have been able to receive $5,000 to 10,000 per acre valuations in the recent past here.”
In the Eagle Ford, TPH estimates that BHP’s Blawkhawk acreage, while one of the most economic positions in the Lower 48, has seen its inventory relatively depleted. The firm estimates about seven years of resources remain, “meaning undeveloped value may be limited to ancillary targets” such as the Upper Eagle Ford and Austin Chalk.
The Hawkville is primarily within a wet gas window and is generally seen as less economic on a relative basis, TPH said.
BHP’s Fayetteville Shale position may also see little value from its undeveloped acreage outside of a few core locations. The company previously reported in May to have started marketing the Arkansas assets.
The divestiture plans by BHP mark a “pretty momentous step-change in its corporate strategy and marks the culmination of its push to be a major shale player,” Weintraub said.
“We expect to see all options being considered with a substantial amount of interest from multiple pools of buyers,” Weintraub said. Private-equity firms, U.S. independents, majors and national oil companies will all want a “seat at the table during negotiations," he said.
In a media call, company leadership made it clear that it plans to be patient with its exit and that it wants to maximize its value. Elliott has previously suggested an IPO of the oil and gas business would increase the value of BHP and a spinoff.
BHP CEO Andrew Mackenzie said the company’s preference would be to sell the business through a relatively small number of trade sales.
“But, there is an execution risk around that. And so, in the interests of making sure we can do things relatively quickly, I don’t want to eliminate other ways in which we could exit these businesses—including things like demergers, IPOs or vending into special vehicles and so on,” Mackenzie said. “We look at everything in order to decide what is the right way through this. But, for now, we think that probably trade sales is where we would prefer to—well, we think we have the best opportunity of restoring and maintaining value for our shareholders.”
Mackenzie also stressed that the company is willing to wait to sell if need be.
BHP operates five rigs across its operations, including four in the Haynesville Shale, with more than 2,500 producing wells operated by third parties.
Tyler Broda, an analyst for RBC Capital Markets, sees BHP’s course as a prudent decision given the cyclical nature of spending as well and a near-term price dependent return profile that waters down the high margin of long-life, top tier assets in energy, iron ore, copper and coking coal.
But the value of BHP’s assets remains a question. RBC recently cut by nearly half the discretionary cash flow valuation for the company’s U.S. onshore business.
However, it’s possible that land swaps and shale drilling innovations, as well as oil price options, may bring in a price higher than its current estimate for BHP’s U.S. oil and gas assets: $4.1 billion.
BHP management indicated they would use value as their guide and remain patient as the company pursues options to exit its position in the U.S.
BHP initially resisted calls to split off or sell its oil and gas business.
In April, Elliott Associates and Elliott International LP—hedge funds controlled by billionaire Paul Singer—that then owned 4.1% of BHP Plc stock, urged the company to sell off its Eagle Ford and Permian Basin oil business. Though BHP generates free cash flow with the assets, Elliott argued that the oil positions are undervalued because they are obscured by the company’s more lucrative mineral business.
BHP initially rebuffed the idea, saying it planned to sell some assets while holding on to more valuable areas such as the Permian.
The company additionally said it would optimize its petroleum business through “operating excellence.” Elliott pointed out that BHP doesn’t actually operate the “vast majority” of its assets.
In June, BHP management conceded that entering U.S. shale market at a high-point in 2011 and acquiring $20 billion worth of assets was a mistake. Jac Nasser, the company’s chairman, recently made similar remarks.
On an investor call on Aug. 22, BHP CEO Andrew Mackenzie again said the shale acquisitions were “poorly timed, we paid too much and the rapid pace of early development was not optimal.”
“When we entered the industry our objective was to leverage our systems and scale, become an industry leader, and then replicate the opportunity around the world,” he said. “However, following a global endowment study, it became apparent that opportunities to replicate U.S. shale oil elsewhere did not exist.”
Since then, the company has moved to improve capabilities and lower investment levels. Since 2013, BHP has divested more than $7 billion in U.S. assets and reduced unit costs by 40%.
BHP CFO Peter Beaven said that “assuming that we are going to be exiting shale” the company still has to look after that business and run it for maximum value.
“We should continue to spend wisely, judiciously, carefully, but I think we should continue to spend and we are assuming that we continue to spend, certainly this year, and to the extent we still have that business next year,” he said.
Darren Barbee can be reached at email@example.com.
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