BP Plc’s (NYSE: BP) blockbuster $10.5 billion deal for a portfolio of shale oil assets from BHP Billiton Ltd. (NYSE: BHP) was not only its biggest acquisition in almost 20 years, but also it signaled the company’s big comeback into the U.S. following the Deepwater Horizon disaster of 2010.

So confident has the U.K. energy major been about its recovery that it had initially expressed interest for the Australian miner’s entire U.S. portfolio, including deepwater assets in the Gulf of Mexico, two people familiar with the deal said.

This part did not come to fruition. But the ambition of top executives alone is a marked difference from the cautious investment approach that has categorized BP since the explosion at its Macondo well, with clean-up and penalty costs so far tallying about $66.5 billion before tax.

“I can’t remember when it has looked this good,” Bob Dudley, CEO, told analysts after reporting quarterly results in July, referring to the growth opportunities he saw for BP over the coming decade.

The BHP assets give BP a much stronger position in the US shale industry, helping it to catch up with rivals who had invested heavily onshore when it was focused on paying out damages and compensation for the spill.

BP had assets in the Permian Basin of Texas and New Mexico, the heart of the latest boom in the U.S. shale oil industry, but sold them to U.S. exploration and production company Apache Corp. (NYSE: APA) in July 2010 to raise badly needed cash.

Now the payments for the spill are running down. BP paid out $2.4 billion cash for spill-related costs, after tax relief, in the first half of 2018, down from $5.5 billion in the whole of 2017.

“Macondo was such a traumatic event for BP, it has taken them the best part of eight years to get it behind them. It stayed in the market’s memory even as they made the payments and improved their portfolio,” said Irene Himona at Société Générale.

The acquisition of 470,000 acres of shale assets from BHP brings BP back into the Permian Basin after eight years and strengthens its presence in the Eagle Ford Shale of south Texas and the gas-producing Haynesville Shale of Louisiana.

It will re-establish BP as an important player in the U.S. shale industry, making it the second-largest oil major, after Exxon Mobil Corp. (NYSE: XOM), in “unconventional” production energy research company Wood Mackenzie said.

The U.S. shale revolution, unlocking previously inaccessible reserves of first gas and then oil was led by smaller independent companies from the time the process was developed in the early 2000s. Early attempts by larger companies to follow their lead often resulted in costly missteps. BHP was one of those that were forced to make multibillion-dollar charges, writing down the value of assets that it bought in 2011.

In recent years, however, there has been a revival of interest in U.S. shale among large international oil companies. Royal Dutch Shell Plc (NYSE: RDS.A), Exxon Mobil and Chevron Corp. (NYSE: CVX), as well as BP, argue that they have learned how to adjust to the unique demands of shale production versus those for the large projects that are their traditional forte.

The oil majors still generally prefer the consistent cash flows from traditional conventional projects, such as crude drilled from far beneath oceans, but U.S. shale projects that can generate production quickly provide additional flexibility.

BP, which also has chemical plants, refineries, petrol pumps and wind farms in the U.S., has domestic production of 745,000 barrels of oil equivalent a day (boe/d) of which almost 60% is pumped from offshore fields in the Gulf of Mexico and from deposits in Alaska.

Onshore U.S. production from shale fields stands around 315,000 boe/d. The BHP assets today produce around 190,000 boe/d, which BP believes it can dramatically increase, taking the share of oil in its U.S. shale business from close to 15% to just under 30% as oil prices rebound.

“The objective of the deal was to give them a liquids position in the Permian with lots of growth potential, which shows just how important this basin is to integrated oil companies,” said Colin Smith at Panmure Gordon. “They just had to do something.”

BP’s decision to make this big commitment to shale was based on its belief that it had at last worked out how to match or beat the cost and productivity performance of its smaller rivals.

David Lawler, who heads BP’s U.S. shale business, was hired from independent producer SandRidge Energy Inc. (NYSE: SD) in 2014 to set up an autonomous unit that could bring an entrepreneurial spirit to operations even as it remained part of an international group.

“We spent the last four years retooling our business getting ready for this opportunity,” Lawler said, after the BHP deal announcement.

Production and development costs in BP’s shale business have fallen 35% since 2013. It took advantage of new technologies that enable flexible drilling and other digital tools for automating work processes, such as for inspections, to manage equipment and service costs while cutting headcount by half.

The effort appears to have paid off. In 2014, Wood Mackenzie valued BP’s Lower 48 operations—the name refers to the 48 contiguous states of the U.S.—at about $5.5 billion. By June 2018 that had risen to almost $10 billion, even though the oil and gas price assumptions used in the valuation were lower.

Lawler added, “As we bring the efficiencies that the Lower 48’s developed over the past two years with the strength of the integrated company, we think we can make a real difference in our free cash flow.”

Increasingly, companies in the shale industry are arguing for the benefits of scale, saying they can achieve more efficient operations and make savings on administration and procurement.

Diamondback Energy Inc. (NASDAQ: FANG), an independent producer focused on the Permian Basin, this week announced an agreed $9.2 billion takeover of rival Energen Corp. (NYSE: EGN), which operates in the same region. It said it could achieve initial cost savings and productivity improvements with a net present value of $2 billion from combining the two businesses.

“The benefits of scale in unconventional plays are massive if you can get the acreage,” said Roy Martin of Wood Mackenzie. BHP had about five drilling rigs working in the assets it sold, while BP believes it can get up to 30.

It is still unclear if Lawler can make the BHP assets pay off. The poor record of international companies in making successful acquisitions in U.S. shale is a reason for investors to be wary. Nevertheless, the deal is a clear statement that BP believes it has turned a corner in the U.S.

“For years, BP’s management had to watch their backs and it was very tough. It was a horrible place to be,” said Société Générale’s Himona. “It’s remarkable how the company has come back.”

How BP’s Deal Stacks Up

Bernard Looney, BP’s head of exploration and production, said that the Lower 48 business was now a “heartland” for the company.

To win the BHP assets, BP beat out Shell and Chevron with their private equity partners, by bidding for all the assets on offer.

Some analysts raised fears that the U.K. oil major could be overpaying. Oswald Clint at Bernstein said there were initial concerns about BP’s ability to absorb the deal within its existing financial framework because the acquisition would substantially lift capex and so hinder shareholder dividends and buybacks.

However, he added, “With a growing dividend and ownership of some of the shale crown jewels, the BP investment case just became more attractive.”

To placate shareholders, BP pledged to stick within the range of its capital expenditure budget of about $15 billion to $17 billion annually to 2021. The company also raised its dividend for the first time in four years.

The gearing target—the ratio of net debt to capital employed—will be kept around 20% to 30%, but it is among the highest of its peers. This is a legacy of the tens of billions BP has had to pay out because of the Deepwater Horizon spill.

BP is paying for the acquisition by using cash on its balance sheet, and it will also issue new stock. It would then divest less attractive upstream assets worth $5 billion to $6 billion, which could include some in the U.S., to fund share buybacks.

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