BP will pay $7 billion to Devon Energy for assets that will extend its reach into Brazil and bulk up its position in the Gulf of Mexico, as the world's top oil companies look to acquisitions to refill depleting reserves. BP said on Thursday that it will pick up interests in 10 exploration blocks in Brazil, Devon's stake in the Kakskida discovery in the Gulf of Mexico, a portfolio of deepwater exploration acreage in the Gulf of Mexico, and Devon's stake in the BP-operated Azeri-Chirag-Gunashli (ACG) development in Azerbaijan.
BP has also agreed to sell Devon a 50 percent stake in its Kirby oil sands interests in Alberta, Canada, for $500 million and that the two companies would form a venture to develop Kirby. The deal gives BP reserves and highly prospective exploration, mainly in the deep water offshore where it is an industry leader. It follows a planned $4 billion deal by Exxon Mobil announced last year to buy a stake in an oilfield offshore Ghana as well as a $3 billion bid earlier this week by Royal Dutch Shell and PetroChina for Australia's Arrow Energy.
"This is an indication of the lack of exploration that the major companies have been doing in recent years in that they are now out buying assets," James Halloran, energy consultant at Financial America Securities, said. "They are letting someone else break the position open for them and they are going in and buying them on the open market." Analysts said the new fields will not significantly contribute to BP's production until after 2015, and they will help the company meet its goal of growing production at 1 to 2 percent per annum in the long term. The deal also gives BP the entry into Brazil which Chief Executive Tony Hayward has long eyed. However, Devon's assets are in the Campos basin, rather than the Santos basin where most excitement is focused after multi-billion-barrel discoveries in recent years.
Devon President John Richels said the company was now likely to top its previous $7.5 billion target from an asset disposal program announced in November. With the remainder of its non-North American assets likely to sell later this year, the company could book after-tax proceeds as high as $8.3 billion. Devon has focused developing its North American assets, including the shale rock properties where it was one of the earliest companies to produce natural gas. Richels said Devon would focus on paying down debt, spending on its current properties and perhaps buy back its own shares, but was unlikely to buy new assets. "We really feel that we have a lot more opportunities than we can pursue," he told Reuters. "There's really no reason for us to go an augment that asset base."
The companies did not put a figure on the reserves that BP was buying but Colin Smith at ICAP estimated that BP has bought 140 million barrels of oil equivalent (boe) of booked reserves, and analysts at Morgan Stanely estimated 160 million boe. ING estimated recoverable reserves could eventually top more than 800 million barrels. However, a BP spokesman said the deal was largely predicated on the exploration upside the fields offer. Some of the best assets being bought, such as the Kaskida stake, are at the exploration stage of development and so have no booked reserves yet. "Kaskida alone could be worth $6 billion," Richard Griffith at Evolution Securities said, referring to the whole field.
BP is buying around 240 leases in the Gulf of Mexico, including Devon's 30 percent interest in the major Kaskida discovery, in which BP already has a 70 percent stake. BP is also adding to its existing interest in the Azeri-Chirag-Gunashli oilfield off the coast of Azerbaijan. Devon's 5.63 percent stake will increase BP's interest in ACG, which produces 820,000 barrels of oil a day, to 39.77 percent. The parties will form a 50-50 joint venture to develop BP's 90,000 net acres of oil sands at Kirby, which Devon said could reach peak production in 2016.
ICAP's Smith said this could unlock the potential of Kirby, which has sat dormant in BP's portfolio for years, and would also help secure a crude supply for BP's Whiting refinery, in which it has been investing heavily in recent years. BP should be able to fund the acquisition out of cashflows or debt, analysts said. BP's gearing ratio was 21 percent at the end of 2009, against a targeted 20 percent to 30 percent range, while analysts believe the company is highly cash generative at current oil prices.
The cost of insuring BP's debt rose, with five year credit default swaps rising 5.5 basis points to 49.5 bps, according to Markit data. Deutsche Bank advised Devon Energy on the sale while BP did not use an investment bank adviser.