Opinion: BHP Permian Sale Hits Reset on Regional Boom

BHP Billiton is leading a reset on prices in the Permian Basin. The $129 billion mining giant is looking to offload shale assets that includes land in the hot West Texas region. The mooted price tag of around $10 billion suggests that valuations are starting to drop. The Permian’s clout remains, but until producers can fix pipeline bottlenecks, a more measured approach makes sense.

BHP has acknowledged that its foray into the U.S. onshore shale boom, which began with a $12 billion purchase of Petrohawk Energy in 2011, was a costly mistake. As others piled into the region, Chief Executive Andrew Mackenzie abandoned plans to leverage shale drilling techniques elsewhere within the mining company. Last August he announced plans to offload some 800,000 acres in the Permian Basin, Eagle Ford, Hanesville, and Fayetteville regions.

Valuations in the area had already come down when Mackenzie announced his plans. Companies focused in the Permian, like Parsley Energy and Pioneer Natural Resources, had seen their enterprise value-to-EBITDA multiples roughly halve over the previous year. While multiples have held steady since then, BHP looks like it may be selling the assets at a further discount. The mooted price suggests a buyer would pay about $12,500 per acre. That’s roughly half the price Exxon Mobil shelled out for acreage in the region in January 2017, and an 80 percent discount to what Concho Resources offered to pay for RSP Permian in March.

Part of the reason for the cheaper price is that a bit more than half of BHP’s U.S. onshore production looks to come from gas, which is far less valuable than oil. But even assuming investors are assigning no value to BHP’s gas production, the oil assets still appear to come at a discount to the most recent transaction in the Permian.

Conservatism is wise. Oil from Texas is plentiful, but infrastructure is scarce. Moving crude out of the region has become expensive, depressing the regional benchmark, Midland crude, to a big discount relative to global oil prices. That could be fixed by next year. But in the meantime, BHP’s backtrack in shale should be a warning. Texas oil booms are often better than they appear.

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CONTEXT NEWS

– BP is in the lead to acquire the U.S. onshore shale oil and gas assets of BHP Billiton after submitting an offer worth well in excess of $10 billion, Reuters reported on July 6, citing people familiar with the matter.

– The company said last August that it was looking to sell assets in the region after coming under fire from activist investor Elliott Management. The sale includes holdings that BHP acquired in its $12 billion acquisition of Petrohawk Energy in 2011, Reuters said.

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(Editing by Tom Buerkle and Amanda Gomez)

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