BP buys that special something

BP joins the carnival

In February, BP’s chief executive, Tony Hayward, told analysts that it would take “something pretty special” to entice it into an acquisition. About five weeks after he uttered these words that “special” something has presented itself.

BP’s agreement to pay Devon Energy US$7bn for assets in Brazil, the Gulf of Mexico and Azerbaijan is indicative of a company in rude health. The London-based firm now produces more oil than any of its peers, its project pipeline is robust and many of the problems Mr Hayward was forced to face on his accession have been successfully negotiated. Armed with a sizable OECD production base, Mr Hayward appears to be moving now to define his tenure, having led the charge back to Iraq last year.

The market had an inkling that BP was eying something. Having all but ruled out a corporate takeover at its strategy review earlier this month—speculation had focused on Tullow Oil, an Africa-focused independent—Mr Hayward suggested asset acquisitions were on the cards. A deal to expand BP’s US shale gas portfolio coincided with the review.

On a number of levels the Devon deal makes perfect sense. BP has long coveted an interest in Brazil. It will now get the chance to apply its deepwater expertise to one of the world’s most exciting deepwater provinces. But Devon’s Brazilian assets lie in the Campos basin and not in the Santos basin, home to Brazil’s large pre-salt discoveries—a fact that appears to have been overlooked in much of the commentary on the deal. The Campos basin is, nonetheless, a prolific offshore region, producing approximately 85% of Brazil’s daily output.

Located directly adjacent to the Santos basin, the Campos basin is thought to house a sizable pre-salt layer—a theory BP will be keen to test. Devon holds a total of ten licences in Brazil, six of which are for the Campos basin, including the producing Polvo field. Perversely, BP may actually benefit from not acquiring acreage in the Santos basin, where vast discoveries have led Brazilian politicians to revise the country’s attractive terms.

But the deal is about far more than Brazil. Devon’s US Gulf of Mexico portfolio will further enhance BP’s leading position in the region—where it is the largest producer (see Rising tide (subscription required)). Notably, the deal will see BP up its stake in the large Kaskida field, which it already operates, to 100%.

BP will also up its interest in the Azeri-Chirag-Gunashli (ACG) development in the Caspian Sea. By acquiring interests in projects and regions it knows well, BP is mitigating much of the risk behind the deal. This probably helps explain its willingness to pay a price at the top end of Devon’s range—set at US$4–7.5bn—and why analysts have been left salivating. One quoted by Bloomberg described it as “one of the best deals BP has ever made”. Praise indeed.

The deal is also timely for Devon. The Oklahoma-based independent has decided to focus on its onshore North American assets, notably its Barnett shale gas acreage. The “shrink to grow” strategy is one that independents are increasingly embracing and the opportunities offered in the burgeoning US gas sector will keep Devon occupied for some time. For Devon the deal is also sweetened by a US$500m agreement to buy a 50% stake in BP’s Kirby oil sands project. Further deals of this type could be on the cards, as independents and smaller integrated oil companies alike seek to divest assets they lack either the capital or interest to develop. By moving first, BP has helped itself to a choice offering—potentially as much as 7bn barrels.