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StockBeat: BP Positions Itself for Shale Patch Bargain Hunt

By Geoffrey Smith

Investing.com -- BP (LON:BP) is bolstering its position for a bargain hunt, and the market approves.

Under a deal announced late on Tuesday, BP (LON:BP) will sell its entire Alaskan business, including production assets on the North Slope and its stake in the Trans Alaska Pipeline System, to privately-held Hilcorp Alaska for $5.6 billion.

The deal is big enough to take BP (LON:BP) more than halfway to its target of raising $10 billion in asset sales by the end of next year and – assuming the deal clears the standard regulatory hurdles – will significantly strengthen the company’s balance sheet at a time when the outlook for the sector is more than usually clouded by the U.S.-China trade war and the risk of a disruptive Brexit. The company’s share price has fallen by nearly 15% since April, as those twin threats to growth have become ever more material.

All other things being equal, the receipts from the sale would bolster BP's cash pile by around a quarter. That should reduce the volatility of its share price, offering some protection against any further worsening of sentiment in the market at large.

It also leaves BP (LON:BP) in an enviable position for future M&A activity, which the company has suggested is likely on more than one occasion. In Tuesday’s statement, CEO Bob Dudley was at pains to stress: “We remain very bullish on the U.S. energy sector. In just the last three years we have invested more than $20 billion in the U.S. and we will continue to look at further investment opportunities here."

He may not have to wait too long. With crude prices having fallen some 20% from last year’s peaks, many operators in the shale patch are once again running into financial constraints. Baker Hughes’ oil rig count hit its lowest level since the start of 2018 last week, and oil services companies such as Schlumberger (NYSE:SLB) have already briefed investors about the slowdown they see coming in the U.S. upstream sector.

To take one admittedly hypothetical example, the $5.6 billion from Alaska would have bought BP (LON:BP) less than 20% of shale bellwether Continental Resources (NYSE:CLR) last year; today it would buy a majority stake.

By 5 AM ET (0900 GMT), BP (LON:BP) was one of the best performers in the U.K. FTSE 100 with a 1.9% gain. The U.K.’s was one of few bourses to rise on Wednesday against a backdrop of continued fears about global growth, with even the 0.4% gain in the FTSE 100 largely a result of sterling’s drop in response to news of the government’s latest maneuver to force through Brexit on Oct. 31.

Other markets were broadly lower, with the Stoxx 600 down 0.4% at 372.22, and the German DAX down 0.5%. Italy’s FTSE MIB outperformed with a decline of only 0.2%, as investors clung to hopes of a new government that would spare the country snap elections in the autumn. A decision on the outcome of talks between the Five Star Movement and Democratic Party isn’t expected until after the market close.

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