BP Buys Devon's Offshore Oil Fields for $7 Billion

In November, U.S. oil and natural gas producer Devon Energy (DVN) said it wanted to sell off its offshore oil assets; the hope was to raise anywhere from $4.5 billion to $7.5 billion. On this news, the Fortune 500 company's stock price rose nearly 5%.

On Thursday, the company announced a deal -- and it was a good one. BP (BP) has agreed to pay $7 billion for Devon's portfolio of assets off the coasts of Brazil, Azerbaijan and the U.S. That's a hefty price tag, but BP said it will continue to focus on cost-cutting and expects to actually increase pretax profits by $3 billion over the next three years.

Betting on Brazil

For global energy companies, Brazil represents a huge long-term opportunity for oil extraction, with at least 80 billion barrels of oil reserves. What's more, the country is politically stable and amenable to foreign investment.

Yet Brazil's oil is mostly in deep water, which means it is expensive and time-consuming to extract. This is why a company like Devon sees better opportunity in selling such assets to an even larger operator such as BP.

In the deal, BP will secure eight license blocks to sites in Brazil's Campos and Camamu-Almada basins. Getting to the oil will require drilling at ocean depths that range from 330 feet to more than 9,000 feet deep; the oil itself is in reserves that in some places lie more than 20,000 feet below sea level, under a thick layer of salt. All of this makes for a technically difficult extraction process, but BP has extensive experience with deepwater drilling. In fact, the company is the largest operator in the Gulf of Mexico.

BP says that Devon's assets may add 40,000 barrels per day to its output next year; with aggressive investment, that output is likely to increase substantially over the long term.

As for Devon, it has agreed to pay $500 million to enter a joint venture with BP in the Kirby oil sands of Canada. This is close to another Devon project called Jackfish, which is already in production.

And with a nice slug of cash, Devon may ultimately strike up more deals in the North American market.

More Cash for Deals

While the fields BP is getting are rich, they aren't the most impressive offshore finds in Brazil: That title goes to the reservoirs of the Santos Basin. The past decade has seen large discoveries in that area, but the cream of those reserves is in the hands of companies like Petrobras (PBR) and other state-controlled entities. The U.K.-based BG Group does have some holdings in Santos. However, acquiring BG would be an expensive move: The company's market cap is roughly $40 billion.

Despite all this, BP is still getting access to strong properties and will have the resources to realize their full value, given that the margins are expected to be healthy. More important, this deal is large enough to "move the needle" for a company that has the ambitious goal of growing production at 1% to 2% for the next decade.