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On the 27th of August, BP plc (BP) announced the sale of its
upstream and midstream oil and gas assets in Alaska. Hilcorp Energy
Co (Hilcorp) is the buyer, agreeing to pay US$ 5.6 billion to
assume ownership of BP's interests. This large sale is a positive
step in BP's planned US$ 10 billion divestment program, aligning
with their strategy. The deal, which included working interest in
the Prudhoe Bay asset, along with the Trans-Alaska Pipeline System
(TAPS) and several other assets, is expected to have significant
implications for the future of Alaskan oil and gas production.
According to our analysis, an important portion of BP's future
revenue stream in North America was slated to come from gas export
to the Alaska LNG project (see chart below). A delay in development
plans will inevitably have an unfavorable impact on the Net Present
Value (NPV) of the assets. Our analysis indicates that the NPV will
contract by approximately US$2 billion under a five year delayed
development plan scenario.
Figure 1: Graph showing percentage of gas revenue relative to
total revenue from BP's oil and gas field assets in
Alaska.
Recent presentations by the Alaska Gasline Development
Corporation show that gas production could commence as soon as
2024/2025 from the area. According to IHS Vantage®, using this as a
start of gas export, sales gas revenue ramps up to approximately
50% of total revenue from the fields sold to Hilcorp by 2030.
However, this analysis was done before BP announced its exit from
Alaska. BP operated the Prudhoe Bay asset and held significant
interest in the Point Thomson asset, both of which were set to be
significant contributors to the Alaska LNG development. Considering
the current pressure on gas price, and with IHS Markit's long term
gas price forecast set to average around US$4.67/mcf from 2025 to
2035, Hilcorp will have to strategically invest in these assets to
ensure a long life for production and stable cash flows.
Figure 2: IHS Vantage project start dates for all assets sold
by BP to Hilcorp.
With current modeled start dates, shown in the table above, the
sold assets in IHS Vantage® have a combined after-tax net present
value (AT NPV) of US$ 14,690 million. This assumes an oil price of
US$50/bbl, gas price of US$3.24/mcf and a 10% discount rate and an
inflation rate of 2%. The projects highlighted in grey in the above
table are future projects that assume gas is delivered to market.
When we adjust the start date of these projects, it has significant
impact on overall value of the assets. While a five year delay
leads to an NPV reduction of approximately US$2 billion, a ten year
delay would practically double the dilution in the NPV of these
projects.
Figure 3: Effects of delayed production on valuation of sold
assets.
The chart above quickly portrays the impact that production and
revenue delays have on valuation of assets. The US$5.6 billion deal
demonstrates the value in the area, however with an investment of
this magnitude, delivery will be crucial. As stated previously, it
is yet to be seen if the gas production will be delayed or possibly
not go forward, given the change in ownership and other possible
complications. Outside forces, such as fluctuating oil and gas
prices can also change these results. Regardless of start date, the
assets hold significant potential, and Hilcorp will look to
maximize this potential through timing of its investments and
efficiencies in its operations.
Isaac Nuti is senior research associate for Vantage at
IHS Markit.
