The oil supermajor BP announced this morning that it will purchase $10.5bn worth of US shale oil assets from BHP Billiton, marking a triumphant Stateside return. A widely-maligned energy company is looking to revitalise its upstream capacity by adding additional 190K barrels of daily oil equivalent production after many years of retrenchment and miserable reputation in the United States following the Deepwater Horizon disaster.

Markets were taking a dim view of the deal’s immediate value, though, as 50% of the purchase is set to be funded via 6 deferred equity placements, diluting the shareholders’ value on top of the $5.25bn in cash the company is doling out up-front.

To placate some of the investor ire, BP is planning to increase its dividend pay-outs by 2.5% to 10.25p for the first time since Q3 2014 and add extra $5-6bn to its share buy-back plans. With BP shares -2% lower in morning trading, would the market reaction to the BP/BHP deal be even worse had the return on shareholder equity not been improved?

The shale deal presents a promising opportunity for BP to reverse many years of underinvestment. With oil prices pushing multi-year highs, addition of unconventional oil assets in the highly-prized Permian basin could be a big win, especially after BHP Billiton already made much of the necessary investment to kick-start their upstream development. A tough break for BHP, which had to take billions of dollars in write-down charges after 2014 oil market collapse, but BP is set to pick up the pieces on the (relative) cheap.

Still, it comes at a price of a short-term hit to shareholder value and would divide those investors looking for a quick profit from rising oil prices and those who see a long-term opportunity in holding Energy stocks.

Artjom Hatsaturjants, Research Analyst, 27 July 2018