Is BP plc a buy after today’s deal with Det Norske?

BP (LSE: BP) has announced this morning that it has agreed to merge its Norwegian operations with the operations of Det Norske, a Norwegian oil company.

Det Norske is one of Norway’s most prominent oil companies and after the merger the enlarged company will be the biggest independent exploration and production company in the Nordic country.

The new business will be called Aker BP and will be owned 40% by Aker, 30% by BP and the remaining stake will be held by existing Det Norske shareholders. Oil services group Aker already owns 50% of Det Norske, which is why the engineering company will take the largest share of the new group.

An incredibly attractive proposition

At first glance, this deal seems like an incredibly attractive proposition for the shareholders of all companies involved. According to Det Norske, the deal will “significantly” strengthen cost efficiency and growth potential and will allow the combined company to initiative dividend payments.

Under the terms of the deal, Det Norske will issue 135.1m shares as compensation for all shares in BP Norge (BP’s Norwegian arm) including assets, a tax loss carry forward of $267m and a net cash position of $178m. Aker will also buy 34m shares from BP are the same price.

BP seems to have struck this deal at the perfect time. The group is struggling to cut costs in the face of lower oil prices, but the same time is facing a certain amount of pressure from shareholders for the company to acquire additional reserves and production capacity at rock bottom prices. 

Today’s deal meets both of these two key objectives. BP produces about 60,000 barrels of oil equivalent daily in Norway and has 225m barrels of oil equivalent in reserves. During the first quarter of 2016, Det Norske reported production of around 61,000 boe a day after acquiring Marathon Oil Corp’s Norwegian oil fields in 2014. So after the combination, the enlarged company will have the capacity to produce over 120,000 boe per day. By combining the two Norwegian production firms, the new management will be able to reduce production costs significantly.

However, the biggest prize of this deal is Det Norske’s 20% stake in the Johan Sverdrup field, one of the largest fields in the Norwegian continental shelf. The resource estimate for the Johan Sverdrup field is between 1.7bn and 3bn barrels of oil equivalent and when completed, the first phase of development is forecast to have a production capacity of between 315,000 and 380,000 boe per day. Production at this rate is expected to continue for 50 years.

The bottom line

All in all then, today’s deal is great news BP shareholders. By merging its Norwegian assets with Det Norske in such a way that BP will be able to receive dividends from the enlarged entity going forward, management has hit its two key targets of lowering costs and increasing reserves. BP’s investment in Det Norske should yield dividends for many decades to come.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.