BHP Buyout Bolsters Long-Term Outlook for BP Stock

BP Plc's (BP) buyout of BHP Billiton's (BBL) could be bidding bulls welcome on the big oil stock.

Shares of the oil giant burst higher on Tuesday, closing up 3.45% to $42.82, after the company's report of strong earnings in early morning hours.

That is helped in no small part by the company's massive $10.3 billion buyout of BHP's onshore U.S. assets, particularly those in the highly profitable Permian basin.

"In 2018 we invested $12 billion of organic capital, underpinned by continued gains in execution performance, great delivery from the team and thereby creating the space for the BHP transaction," BP Upstream CEO Bernard Looney said. "We strengthened our portfolio notably through the acquisition of BHP's U.S. onshore assets which added 4.6 billion barrels to our resource base."

Analysts were bullish on this particular acquisition given its already visible impact on the company's big earnings beat.

"Into the fourth quarter, we were concerned around BHP integration, downstream headwinds and higher gearing. This proved overly cautious," J.P. Morgan analyst Christyan F. Malek said. "The BHP acquisition continues to surprise to the upside in terms of productivity and cash synergies."

The cash synergies have been a blessing for BP shareholders given the company's history of divestments in recent years to fund ballooning Macondo payments that have now eclipsed $65 billion since the time of the Deepwater Horizon disaster.

To be sure, the company is guiding over $10 billion in divestments over the next two years, in order to polish off litigation costs and fund this large-scale transaction.

The high cost of the deal did raise questions shortly after its close, as the closure on November 1 saw oil prices on the WTI crude decline from around $67 per barrel to around $40 per barrel on Christmas Eve.

Yet, with a recovery in oil prices in recent weeks and bullish outlook from management, the transaction could make the shale-rich regional purchase even more lucrative than its already showing to be.

Additionally, the company's cash pile has shown its flexibility through the transaction, which is already almost fully paid for.

"Through the end of January, we have paid the initial consideration and three deferred installments totaling $7.7 billion with the remainder to be paid through April," CFO Brian Gilvary explained.

As that drag comes out of the portfolio, the BHP projects will become strong tailwinds instead of headwinds, adding to the bullish sentiment stoked by the rolloff of Macondo payments.

"A real improvement in the returns average that we see in what is ahead of us in the plan," Looney concluded. "I think the post-acquisition returns on the BHP transaction are going to be above 25%, again at $55."

Given the strong oil outlook offered by management and moves in the relevant indices, that $55 price target could end up cautious as well, which would certainly be welcome for BP investors.

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