BP Acquires Devon: Another Feather in This Oil Heavyweight’s Cap
by Tony Daltorio, Investment U Research
Friday, March 19, 2010
Management at oil giant BP ADR (NYSE: BP) must firmly believe in the old adage “Better late than never.” Because after lusting after the natural resources off shore of Brazil for years, it’s finally joined the party.
In BP’s largest deal in seven years, the company bought assets from the U.S. independent oil and gas company Devon Energy (NYSE: DVN). The deal involved BP paying $7 billion, plus a 50% interest in its Kirby oil sands leases in Canada. In return, Devon handed over the rights to sites in the Gulf of Mexico, both in Brazilian and Azerbaijan territory.
Those properties are a perfect fit for BP. They give the oil maven total control over the giant deep-water Kaskida oil field in the Gulf of Mexico. BP already owned 70% of the 2006 discovery, but it welcomes the remaining 30% from Devon.
In Azerbaijan, Devon only has a 5.63% stake in the ACG field. which BP will happily add to its 34%, especially since it operates the field.
But BP is most interested in Brazil, the site of some of the biggest oil discoveries in recent years.
BP’s New Campos Basin Assets
The assets Devon sold BP are located in the Campos Basin. That area accounts for 85% of Brazil’s nearly 2 million barrels of daily oil output. And it has produced heavy-grade product with regularity from shallower depths.
Compared to the Santos Basin further south, Campos has proven less exciting when it comes to finding new fields. But now, with firms like BP and Brazilian oil company Petrobras ADR (NYSE: PBR) turning their attention to Campos, it could get interesting again.
Like the Santos Basin, Campos has subsalt oil fields. And while nobody knows exactly how much it has, Petrobras believes it’s a worthwhile amount. It’s director of exploration, Guilherme Estrella – also known as the father of Brazil’s subsalt – even recently compared it to Saudi Arabia.
So far, the company has already found more than 2 billion barrels of light subsalt oil beneath existing heavy oil fields, so he may just be right about that prediction. But even if Campos falls short, the reduced costs of production in the larger basin should make up for it.
In the Santos Basin, oil companies have to drill over a mile beneath the surface to reach their goal. And creating a single well can cost over $100 million. The Campos Basin, however, is more ideally situated at much shallower depths and much closer to shore. Companies only have to drill 600-700 feet in order to reach their goal.
Petrobras has already started pumping from the Campos subsalt by drilling through existing wells and linking to the deeper subsalt fields. This eliminates the need for new platforms and other infrastructure.
BP-Devon Deal… A Closer Look
A closer look at the BP-Devon deal shows that the company’s balance sheet can easily support it.
Net debt-to-capital employed will rise from 20% to around 24%, still comfortably lower than BP’s 30% limit.
Critics point out that the company’s stock dipped after it announced the deal. And at first glance, it does appear that BP is paying too high a price. The acreage BP purchased currently produces a mere 40,000 barrels of oil per day. And proven reserves come in at only about 150 million more. So taken at face value, this implies that BP paid a pricey $47 per barrel of oil equivalent.
But investors need to look a little deeper than that.
- Devon’s calculations suggest that BP actually acquired 6-7 billion barrels worth, making it cost a mere $1 a barrel!
- Or, even from a more conservative estimate, BP gained $1.6 billion barrels of oil equivalent, working out to about $4.40 a barrel… Still not bad at all.
In addition, BP is the leading international, deep-water oil company. Last year, it produced over 650,000 barrels of oil and gas per day from deep water. And it has a lot of experience with the production side of that business, which will come in handy when developing its new Brazilian assets.
BP has already done very well in finding and extracting deep-water oil and gas in the Gulf of Mexico.
Take the giant Tiber oil field, which it discovered last year. Or the Thunder Horse development site, which it recently brought on-stream. Projects like those have made BP the largest producer in the area, with a total output of 400,000 barrels a day of oil and gas.
The Campos Basin should turn out to be yet another feather in the company’s cap. BP wants to sustain 1-2% production growth per year in the second half of the decade. And this most recent deal is most definitely a step in that direction.
Good investing,
Tony Daltorio
- BP: British Petroleum. Big Profits
- Peak Oil and Petrobras
- Attention, Barrelheads: Petrobras Shares Are on Sale
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