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BP to Substantially Boost U.S. Onshore Upstream Expenditure

Zacks Equity Research

BP plc BP intends to hike U.S. onshore upstream expenditure for 2019 in the range of $2-$2.5 billion, significantly higher than last year’s $1 billion, per Mohit Singh, the senior vice president for business development and exploration of BPX Energy (U.S. onshore oil and gas unit). Recently, Singh was a panellist at Hart Energy's DUG Permian basin conference in Fort Worth, TX. He thinks that shale developments, especially in the Permian Basin, will attract major investments from public markets.

While the recent trends show that the oil and gas industry deserves more flow of capital from public markets, Singh remains hopeful that good news is around the corner. Singh, along with representatives of Diamondback Energy, Inc. FANG and others, cited the recent $50-billion acquisition of Anadarko Petroleum Corporation APC by Chevron Corporation CVX as a proof of things turning in favour of the industry. The deal reflects the importance of shale plays in the hydrocarbon industry.

BP intends to increase 2019 capital expenditure for U.S. onshore upstream, while keeping overall budget within the guidance range of $15-$17 billion. This will lead to lower allocation for other businesses of the company. Its total capital expenditure in the last year was $15.1 billion.

The sudden jump in investments allocated to U.S. onshore upstream seems justified, considering that the company took over BHP Billiton’s U.S. operations last month. In total, BP acquired roughly 470,000 acres of land in shale plays including the Permian Basin, Eagle Ford and Haynesville basin, with total daily production capacity of 190,000 barrels of oil equivalent. Other assets, which cannot be capitalized by the company, is planned to be divested.

No wonder BP is shifting its focus toward these shale assets as the integration of onshore U.S. shale acres is expected to boost free cash flow to $1 billion, taking the latest free cash flow target for 2021 to $14-$15 billion. The BHP asset-acquisition is expected to lead to significant cost reductions that will likely be sustainable and create pre-tax synergies of more than $350 million every year.

Price Performance & Zacks Rank

BP has gained 2.2% in the past year against 6.3% collective decline of its industry. Currently, the company has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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