BHP to Acquire Additional 28% Stake in Shenzi Oil Field for $505 Million; Target Price GBX 1855

BHP Group, one of the largest diversified natural resource companies in the world, said on Tuesday that it has signed a sale agreement with Hess Corp to acquire an additional 28% stake in Shenzi oil and gas field in the Gulf of Mexico for $505 million.

The deal would bring BHP’s ownership to 72% and immediately add approximately 11,000 barrels of oil equivalent per day of production. The effective date of the transaction is July 1, 2020 with an expected close by December 2020.

“We forecast oil production of 99 million BoE for FY21 compared to company guidance of 95-102 million BoE and the acquisition of the additional stake in Shenzi would increase our base case production to 102 million BoE,” said Alain Gabriel, equity analyst at Morgan Stanley.

“The transaction’s rationale, according to the statement, is to target counter-cyclical acquisitions in high-quality assets that are (or near) production stage and that provide upside optionality to a price recovery at a low-point in the cycle.”

BHP Group’s shares traded 1.46% lower at GBX 1628.4 on Tuesday, the stock is down about 8% so far this year.

BHP Group stock forecast

Eleven analysts forecast the average price in 12 months at 1,855p with a high forecast of 2,200p and a low forecast of 1,650p. The average price target represents a 13.82% increase from the last price of 1,629.80p. From those 11, nine analysts rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley target price is GBX 1,700 with a high of GBX 2,800 under a bull scenario and GBX 690 under the worst-case scenario. BHP Group has been assigned a GBX 1,800 price target by research analysts at Credit Suisse Group. The brokerage presently has a “buy” rating on the stock.

Other equity analysts also recently updated their stock outlook. Deutsche Bank restated a “buy” rating and issued a GBX 1,650 price target on shares of BHP Group. JP Morgan reiterated an “overweight” rating. Royal Bank of Canada lowered their price objective to GBX 1,900 from GBX 1,950 and set an “outperform” rating. Goldman Sachs Group lifted their price objective to GBX 1,850 from GBX 1,780 and gave the stock a “buy” rating.

Analyst view

“BHP’s portfolio mix and quality stand out among peers. The low-cost position of its assets enables the company to generate FCF yield even in a stress scenario. It maintains a strong B/S, giving the flexibility to pursue growth and/or increase cash shareholder returns, in particular given the company’s net debt target of $12-17 billion (post-IFRS16 adjustment) vs 1HFY20 levels of $12.5 billion,” Morgan Stanley’s Gabriel added.

“Spot FCF yields are comparable to peers, even without contributions from the Petroleum division, thus implying long-term optionality to a potential oil price recovery. We prefer BHP on a relative basis, given its attractive commodity mix ex-Iron Ore and free optionality on a potential oil price recovery.”

Upside and Downside risks

Upside: 1) Growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam) successfully executed. 2) Better operating performance, lower costs and capital expenditure. 3) Higher commodity prices – highlighted by Morgan Stanley.

Downside: 1) Execution issues at growth projects (Jansen potash, Escondida growth, Spence hypogene, Olympic Dam). 2) Weak operating performance, higher costs and capital expenditure. 3) Lower commodity prices.