The planned $7.0 billion purchase of Devon Energy's international and offshore assets gives BP an important entry into deep-water Brazil and enhances its position in the US deep-water Gulf of Mexico and Azerbaijan oil-producing regions. We think this asset purchase makes strategic sense for BP, which we see as a more natural buyer than other major oil companies.
In Brazil, the deal will give BP interests in eight blocks in the Campos and Camamu-Almada basins as well as two onshore leases. The acquisition of Devon's interests in 240 Gulf of Mexico leases will secure BP's position as the dominant oil and gas producer in the Gulf. These assets also include four producing oil fields--Zia, Magnolia, Merganser, and Nansen--and prospects to explore for Paleogene-age oil prospects. Also, BP will now own 100% of its recent Kaskida discovery. In Azerbaijan, BP is boosting its interest in the ACG development to 39.77% by acquiring Devon's 5.63% stake. Also, BP will sell Devon a 50% interest in its Kirby oil sands interests in Alberta for $500 million. The two firms agreed to a 50/50 joint venture to develop this interest with Devon as operator. Devon will fund $150 million of project costs on BP's behalf.
BP has ample liquidity to fund this purchase, with a year-end cash balance of more than $8 billion and robust borrowing capacity. These high-potential exploration blocks could help the firm achieve its targeted 1%-2% long-term production growth. BP has enough projects to support this goal near-term, but these exploration blocks, if successful, could support longer-term objectives. Given its previous $1.3 billion Gulf of Mexico sale and Thursday's BP deal, Devon is tracking slightly better than expected on its asset sales goals announced last year (which sought $4.5 billion-$7.5 billion in aftertax proceeds). With just over $7 billion in short- and long-term debt at year-end 2009, Devon will be well positioned to further consolidate the North American natural gas industry, should gas prices fall, or accelerate drilling within its portfolio, should prices rise.
