A counter to years of US shale deals

Sept. 18, 2017
In my little corner of the work world where coverage of the North American independent producer reigns supreme, news about merger and acquisition activity and the shedding of "non-core" assets, more often than not in recent years, details a company shedding one unconventional asset for another. 

IN MY LITTLE CORNER of the work world where coverage of the North American independent producer reigns supreme, news about merger and acquisition activity and the shedding of "non-core" assets, more often than not in recent years, details a company shedding one unconventional asset for another. The biggest news as of late counters that trend.

On August 22, BHP Billiton reported financial results for the year ended June 30, 2017. In it, the mining giant shed light on plans to divest onshore US assets (read: US shale). "We have determined that our Onshore US assets are non-core and we are actively pursuing options to exit these assets for value," the report said. BHP Billiton's purchase of Houston-based Petrohawk for $15 billion, including debt, in 2011-the height of "the shale revolution," didn't bode well for the company as prices plummeted. Shareholders, including US hedge fund Elliot Management, have pressed BHP to sell the assets, and BHP management itself has voiced its own thoughts on the ill-timed deal. Shares of BHP were up 1.2% the day the news was released.

As for how the assets will be sold, the company said it will be flexible with plans and commercial in its approach. As part of an analyst briefing Q&A following the company's financial report, BHP CEO Andrew Mackenzie told JP Morgan analyst Lyndon Fagan that 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," he said. So, he continued, "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."

Going further, Mackenzie said "one of the features of shale, which we've grown to like a bit less with time and see it a bit more of a curse, is that the investments that are demanded there are quite pro-cyclical. You have to continue to invest to actually maintain the value of those businesses. In this case, we're very fortunate that we have investments that we can make that we think perform very well in the capital allocation framework, and, as I said, won't just add profitability and value; they will add marketability to these assets. But, as always, we review this very, very regularly through the lens of the capital allocation framework. And, because of the short-term nature of shale, we do that with a much greater frequency right to the very top of the company."

RBC Europe Ltd.'s Tyler Broda said BHP's plan to sell the US onshore business "is a prudent decision" and as "the pro-cyclical nature of the capital spend, as well a near-term price dependent return profile, waters down the high margin long-life Tier I assets elsewhere in Energy, Iron ore, Copper and Coking Coal."

Overall, Broda noted, "our recent oil price deck change, which brought our oil price forecasts down by c. $10/bbl through the medium-term, and the resumption of an aggressive capex program, our DCF driven valuation for the US onshore business fell nearly in half. There is certainly potential that land swaps and further innovations in shale drilling technology, as well as optionality around oil prices will bring a higher price than our revised $4.1bn valuation for the US onshore division, especially in a trade sale. However, at BHP's total enterprise value of $130bn, we question whether this can drive enough value to change our muted outlook for the share price, especially with capex increasing elsewhere."

Asked about BHP's other petroleum assets on the August 22 analyst briefing, Mackenzie told Citi's Clarke Wilkins that the conventional petroleum business was "a great business" and has been for BHP for over 60 years. "It has phenomenal returns, EBITDA margins at 66%. And we're good at it. We have some of the lowest costs in the industry - about $10 a barrel. And look at the success of this year in terms of exploration. Potentially two very significant discoveries: one in Trinidad, one in the Gulf of Mexico. And getting to the front of the queue as private industry goes back into Mexico to win the Trion bid," Mackenzie said of conventionals, noting that BHP has been "pivoting back" since actively reducing its footprint in shale "for the better part of two or three years."

Another large company, Total, looked past US shale when it made a recent purchase of conventional oil and gas assets through a US$7.5 billion deal with AP Moller Maersk. The purchase of Maersk Oil helps solidify Total's portfolio of conventional oil and gas assets in Europe and Africa.

For BHP, said Wood Mackenzie research analyst Jon Weintraub in a note to press, the move away from US shale "is a pretty momentous step-change in its corporate strategy and marks the culmination of its push to be a major shale player."

For Total-quoting the company's CEO Patrick Pouyanne from an August 22 Bloomberg report- "shale assets were "quite expensive" and the company "wasn't the best company to develop them." By phone for the article, Brendan Warn, head of international oil and gas equity research at BMO Capital Markets told Bloomberg that US shale isn't Total's core competency and that "they've tended to be contrarian almost and focus on offshore, conventional" projects.

For these and other companies, myriad factors go into M&A decisions, but the big picture value placed on conventional oil and gas assets in these cases is certainly of interest. Circling back to BHP's plans to divest what Wood Mackenzie's Weintraub calls "significant exposure to some of the most active plays in the US Lower 48 including the Permian, Eagle Ford and the Haynesville," and my corner of the energy world, I agree when Weintraub says to expect all options to be considered with "a substantial amount of interest from multiple pools of buyers...private equity firms, US independents, majors, NOCs will all want a seat at the table during negotiations."

About the Author

Mikaila Adams | Managing Editor - News

Mikaila Adams has 20 years of experience as an editor, most of which has been centered on the oil and gas industry. She enjoyed 12 years focused on the business/finance side of the industry as an editor for Oil & Gas Journal's sister publication, Oil & Gas Financial Journal (OGFJ). After OGFJ ceased publication in 2017, she joined Oil & Gas Journal and was named Managing Editor - News in 2019. She holds a degree from Texas Tech University.