BP CEO's Next Step in Its Turnaround? Start Buying

(MoneyWatch)  BP will cement its dominance in the Gulf of Mexico, take greater control of a Caspian Sea project and enter into the deep water oil fields of Brazil -- an area CEO Tony Hayward has coveted for some time -- all in a single $7 billion deal with Devon Energy. The acquisition could catapult BP (BP) past its rivals if the company can control project costs, something it has struggled with in the past.

The move may seem like an about-face for Hayward, who never alluded to mergers or acquisitions as part of BP's strategy during an investor presentation held just last week. Instead, Hayward spent the bulk of the presentation outlining an ambitious plan to increase annual profits more than $3 billion in the next few years and to expand production as much as two percent a year through 2015. Hayward planned to hit that goal by cutting costs, selling its marketing business in several African countries and centralizing all oil and gas project management in Houston -- not by buying more assets.

As surprising as the $7 billion deal may be, it still makes a lot of sense for BP. The company is already the largest leaseholder in the Gulf of Mexico. And BP recently surpassed Royal Dutch Shell to be the area's biggest oil and natural gas producer, with net production of 400,000 barrels a day of oil equivalent.

BP already has an established footprint in the Gulf, and buying Devon's assets there simply expands its acreage. And then there's the deep water oil and gas fields offshore Brazil, which BP had been excluded from until now. All of these assets, some of which are already producing oil and gas, will help BP boost its production and hopefully, its profitability.

Three years ago, the deal would have been disastrous. But since Hayward took the helm in 2007, he has made BP a leaner, better performing company by cutting out useless layers of management and improving how it buys good and services from third parties. He squeezed $4 billion out of BP last year alone by reducing overhead by more than one-third and cutting 7,500 jobs to date.

The acquisition will test BP's efforts to improve project management, however. In the past five years, BP has overspent by about 20 percent on its major projects -- mainly because of poor project management, Andy Inglis, the company's head of exploration and production, told investors last week. BP is trying to correct that by moving all oil and gas projects to a central management office, which is the biggest change to its exploration and production operations since the acquisition of Amoco 12 years ago. BP expects to save more than $700 million a year just by streamlining that management.

Here are some details of the $7 billion deal to buy Devon Energy's offshore and international assets:

• The deal includes interests in 10 exploration blocks in Brazil;
• Eight of the Brazilian blocks are in the Campos and Camamu-Almada basins, in water depths ranging from 330 to 9,100 feet;
• The Campos basin blocks include three discoveries -- Xerelete, pre-salt Wahoo and Itaipu -- and the producing Polvo field;
• BP will buy some 240 leases in the Gulf of Mexico and interests in four producing oil fields
• BP will buy Devon's 5.63 percent stake in the ACG development in Azerbaijan in the Caspian Sea and will increase BP's operating interest in the fields to 39.77 percent;
• In a side deal, BP will sell Devon Energy a 50 percent stake in its Kirby oil sands interests in Alberta, Canada for $500 million

Photo of Marlin semi-sub platform in the Gulf of Mexico from BP