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BP Plc Looks to Play U.S. Shale Boom Differently

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BP Plc (NYSE: BP  ) last week announced that it plans to form a separate business to manage its U.S. shale oil and gas assets. The company believes the move will improve competitiveness. The move comes as major oil companies have failed to capitalize on the shale boom in the same way independent oil and gas companies are. But will the strategy work?

BP's plans
Last Tuesday, BP said that it plans to establish a separate business to manage its U.S. shale oil and gas assets. The company cited unique characteristics of the U.S. Lower 48 oil and gas business environment as the reason for separating assets.

BP said that its new business will operate separately from the rest of the company. The company believes that the move will allow the U.S. Lower 48 onshore business to adapt to the rapidly changing and hyper-competitive energy landscape in the region.

Although BP will continue to own the business, it will be led by a separate management team and will also operate from a separate location in Houston. The unit will have separate governance, processes and systems. This will clear some of the bureaucratic hurdles faced by the unit as part of the larger organization. BP also expects to start disclosing separate financials for the new business from 2015.

Big oil's big miss
Big oil, certainly, has missed a trick when it comes to U.S. shale oil and gas assets. None of the oil majors have been able to capitalize on the shale boom like smaller independent oil and gas companies are. In fact, UBS, in its Global Oil & Gas Analyzer report last year, excluded all major oil and gas companies from the list of best stocks to play the shale boom in the U.S. The list included smaller independent oil and gas companies such as Pioneer Natural Resources (NYSE: PXD  ) and Continental Resources (NYSE: CLR  ) .

Not surprisingly, Pioneer Natural Resources and Continental Resources have been among the best performing oil and gas stocks, gaining more than 27% and 47%, respectively, in the past year. In contrast, BP and ExxonMobil (NYSE: XOM  ) have gained more than 19% and 5%, respectively. While BP's performance has been respectable, none of the gains can be attributed to the company's exploits in the U.S. shale oil and gas play.

Will BP's move work?
The key question is whether BP's move will work. One reason why BP and other oil majors have not been able to capitalize on the shale boom like independent oil and gas companies is their size. Because shale formations can start producing within months, unlike conventional oil and gas fields, they require quicker decision making based on short-term movements in price. Smaller, nimbler companies have therefore succeeded in the U.S. shale oil and gas play. In this regard, BP's decision is certainly right. In fact, this is something Exxon did with XTO Energy, which it acquired in 2009. But in Exxon's case the strategy has not worked so far.

The reason why Exxon's strategy hasn't worked is weak natural gas prices. Barring the recent spike due to the extremely cold weather in the U.S., natural gas prices in the U.S. have been weak as the shale boom has resulted in a supply glut. This is something that could fail BP's strategy. Several oil and gas companies have shifted their focus from natural gas to oil in the wake of weak prices. BP can do that as well but increased oil production from shale could also create a similar glut in oil supplies.

Indeed, there is every chance that BP's strategy might not work at all. A lot depends on supply and demand, and how oil and natural gas prices evolve. But by separating the U.S. shale business, BP is giving itself the best and perhaps the only chance to capitalize on the shale boom.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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