BHP Group: Moves counter-cyclically

About the author:

Adrian Prendergast
Author name:
By Adrian Prendergast
Job title:
Senior Analyst
Date posted:
07 October 2020, 4:00 PM
Sectors Covered:
Mining, Energy

  • BHP is acquiring an increased stake in Shenzi in Gulf of Mexico for US$505m.
  • Adds 52mmboe of reserve (2P+2C) and ~11kboepd to production.
  • Hess needed to divest the stake to fund development elsewhere, with earnings depressed.
  • BHP is taking advantage of the cycle with an opportunistic value accretive bolt-on acquisition, taking its interest in Shenzi to 72%.
  • We maintain our Hold rating with a revised target price (login to view target price). 

Opportunistic acquisition

True to its word that it would take advantage of cycles by making counter-cyclical moves, BHP announced it was acquiring Hess’ 28% interest in the Shenzi field in Gulf of Mexico for US$505m.

BHP is already the operator of Shenzi, with the acquisition taking its interest to 72%. The deal will have an effective date of 1 July 2020, and is expected to be finalised by calendar year end.

Net cash flow generated between the effective and completion dates will be deducted from the purchase price, which at current oil prices we do not expect will have a large impact on the consideration paid. Contingent on some conditions.

The right kind of acquisition

The increased stake in Shenzi will add 52mmboe of reserves and resources (2P+2C) to BHP, and ~11kboepd (thousand barrels of oil equivalent per day) to group production.  Updating our estimates for the acquisition, our DCF valuation on BHP has increased.

A bolt-on acquisition in terms of order of magnitude to BHP, but does indicate a robust ~US$710m returning investment based on our long-term oil price forecasts.

People have mixed views on the big miner’s sizeable participation in petroleum, but we consider BHP a capable petroleum operator who is creating value through what is clearly the low-point in the energy cycle with oil prices destined to eventually recover (driven by the drastic lack of industry investment in supply).

The right kind of acquisition

The cycle has generated this opportunity, with depressed earnings leading seller Hess to comment in its own release that it essentially needed to conserve capital for developments elsewhere.

For BHP, we expect acquiring ~11kboepd of production at a deep water field BHP already operates for US$9.7/boe (resource multiple) will prove to be an effective acquisition.

We also expect BHP to make additional acquisitions/divestments along these lines as CEO Mike Henry moves to optimise its asset portfolio.

Maintain our Hold but nearing value

Recent share price weakness has started to push BHP down towards value territory.

BHP offers a good mix of ongoing earnings strength through its iron ore and copper exposure, with leverage to an eventual global economic recovery through coal and energy resources.

We maintain our Hold rating on BHP, which is currently trading near fair value against our revised target price (login to view target price). 

However further volatility could generate an opportunity to increase positions in BHP. The key risk to our Hold call is global economic conditions (commodity demand drivers).

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Disclaimer: Analyst may own shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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