BP pilots unique shale management strategy in the US
Global oil giants flock to the US shale block, but the question is how to best integrate this flexible short-cycle asset into the company's vast portfolio.
BP believes that they have found the answer. The company recently tested its unique strategy by acquiring the Australian BHP Billiton (BHP) onshore portfolio in the US – operating like an independent producer, similar to what ExxonMobil used to do. In 2010, after ExxonMobil acquired the US shale giant XTO Energy for $36 billion, it was initially necessary to keep XTO separate, but it was not.
BP's approach is to separate the land operations in 48 states in the United States three years ago, and establish headquarters in Denver and Oklahoma City to manage business operations. This makes it easier to recruit different talents than the group's headquarters in Houston. The financial performance of the two units is also accounted for separately, in order to be directly comparable to the US independent companies that lead the development of shale oil and gas.
BP's creative handling of shale assets is also out of necessity. In 2010, the catastrophic oil spill in the US Gulf of Mexico caused a heavy price for BP. The company's financial cash flow was not large enough to carry out large-scale shale asset acquisition. If shale is a core business, BP must figure out how to run profitable assets that must operate in new ways.
BP is an early company in the oil giant that entered the shale business, but made a series of mistakes. The company was based on the resource-rich Eagle Beach in the early days, but it was not constrained by the economically poor gas and failed to turn to profitable crude oil in time. The company initially placed a bet on the North Utica shale, which was considered to be another important tight reservoir in the United States and was not successful.
After separation from the parent company, 48 State BP "eyes inward", prioritizing operational capabilities, and promoting multi-lateral well technology in Colorado, Wyoming, and Oklahoma. Since the independent operation of 48 State BP, although it has achieved some success, such as obtaining discovery, investing in research and development costs, and reducing unit production costs by more than one-third, BP's unconventional asset portfolio is still dominated by gas. The acquisition of BHP Billiton's assets is an attempt to solve this problem, despite the financial pressures caused by the Gulf of Mexico accident.
BP's upstream owner, Bernard Looney, admits that the move seems to contradict BP's previous statement that "no need to buy US land assets unless it substantially increases the company's resource mix," he argues. "This acquisition is a testament to this. "The BHP Billiton assets, especially the 83,000 acres of tight oil assets in the Permian Basin, can increase the company's crude oil share in 48 states from 14% to 27%, and further likely to reach 35% to 40%. .
The analysis believes that it is still too early to call 48 State BP a true independent company. The company's decision reflects that the parent company needs to increase the production of crude oil, preferentially increase shareholder dividends, and reduce the corporate debt burden. The acquisition of BHP Billiton's assets can provide significant cash flow to the company, but it also includes a certain amount of gas-based assets. For producers who focus on oil in the Permian basin, it is necessary to consider the part that is stripped out. .
Whether BP's integrated asset portfolio in the US is superior to a truly independent company that divests assets is still controversial. 48 State BP has missed several opportunities to gain oil in the Permian basin. In 2018, the basin's producers, RSR Permian and Energen, sold it at roughly the same cost as the acquisition of BHP Billiton assets.
Dave Lawler, CEO of 48 State BP, told reporters last week that one of the most important reasons for evaluating BHP Billiton assets is to generate significant cash flow. BP is able to control the transaction structure and increase dividends while adhering to the capital expenditure plan. As for the ability to handle more natural gas, BP is already the largest natural gas trader in the United States, and has registered the LNG export capacity at the US Gulf of Mexico Freeport terminal, which will be launched next year.