BP = Buying Production

Jim Brown
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If the BP purchase of Devon's global assets goes through BP could increase its daily production by 2015. There are still some bidders in the race but it appears BP is leading the pack to buy the Devon assets. As the race to bulk up ahead of Peak Oil accelerates we are going to see many more deals like this.

According to the reports Devon is looking to sell assets in Brazil, the Gulf of Mexico and Azerbaijan to BP for as much as $7 billion. Devon was hurt bad in the hurricanes several years ago and took some huge losses in the gulf. Devon management got a bad taste in their mouth from the deep-water losses and the expenses of carrying out a deep water exploration program. They resolved to dump their offshore projects and concentrate more on North American land based projects where the risk was minimal.

After entertaining a parade of bidders they seem to have struck a deal with BP (BP) that will include Devon (DVN) buying $500 million for a half interest in the Kirby oil-sands project in Alberta. Devon will operate the project, which has not yet been developed.

Chevron (CVX) and CNOOC (CEO) are still technically in the bidding but well behind in the race. BP has been slimming down for several years and it at the right spot in its restructuring to take on new projects and BP is not afraid of deep water or third world countries.

If the deal closes BP would gain 10 blocks off the coast of Brazil in the Campos, Camamu-Almada basins and the Parnaiba Basin. These are the areas where Petrobras (pbr) and others have been so successful in finding oil over the last three years. BP would also end up with 240 leases in the Gulf of Mexico where BP is already a big player with production of 500,000 bpd. BP was involved in drilling the world's deepest well in the gulf at 35,000 feet and discovered the giant Tiber field.

In Azerbaijan BP will gain a 5.6% interest in the ACG field sixty miles offshore in the Caspian sea. That will increase BP's ownership to nearly 40% in that field.

One analyst called this entire transaction one of the best deals BP has ever made. It could boost BP production by 40,000 in 2011 and 100,000 by 2015. That 2015 production is sure to be well into the triple digits range per barrel when it is produced. It could easily be over $150 per barrel if not more. Buying existing and guaranteed future production today at well under $40 per barrel will have large benefits later.

Devon will be free of the major cash drain from exploring these fields. At only $32 billion in market cap it simply could not continue to generate the tens of billions needed in capex to successfully build out these plays in a short period of time. BP has a market cap of $178 billion and the cash necessary to go full speed ahead in developing these plays. It was a great deal for both companies and should only get better for Devon if Chevron and CNOOC up their bids.

As Devon slims down and concentrates its resources it could easily become a take over target for Exxon (XOM), Conoco (COP) or even Chevron. Since Exxon is in the middle of a $41 billion deal for XTO (XTO) it is probably a less likely acquirer even if it wants to increase its exposure to North American oil. For Conoco with a market cap of $76 billion it would be a huge acquisition. That makes Chevron with a market cap of $149 billion the likely acquirer. Chevron is just now getting over the Burlington acquisition from several years ago and they are heavy into natural gas production. Diversifying and increasing their oil assets with Devon and adding to their already prime gas assets could make a Devon conquest a really appetizing scenario. If they wait until Exxon has had time to digest XTO they could lose the opportunity.

Also, even with oil at $82 today they are not likely to get a better deal. Oil is not going back down to last years levels and as each day passes we get that much closer to the next peak oil spike. It would be better for them to buy Devon or anybody for that matter at a discount today than wait 2-3 more years and be trying to get a discount off $125 - $150 per barrel. These CEOs know what is coming. They may not be publicly proclaiming peak oil ahead but they know it is coming.

Another reason to bulk up on North American assets is safety. Once peak oil arrives any international asset is subject to confiscation by the host country. Once peak oil is confirmed there will be no leases sold to international oil companies. It will all be done by national oil companies on their own leases. The major IOCs are fully aware that the opportunities for exploration around the world are shrinking every day. They are all flush with cash but have no place to invest it for a reasonable return. Iraq just contracted with a dozen companies in a high-risk region for $2 a barrel in profits. The oil companies were glad to get it. Maybe not glad but there was no shortage of bidders. That proves how hard up they are for decent exploration opportunities.

The acquisition stories in the energy sector are just beginning with the XOM/XTO deal. We can expect a lot fewer companies five years from now and those who are left will have their assets concentrated on this side of the world where they have a better chance of keeping them safe from governmental nationalism.

Jim Brown

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