The continuing slide in oil and gas prices (especially in the US where gas prices fell 9% this week on mild winter weather) has overshadowed the usually headline grabbing iron ore operations of BHP Billiton (BHP) in its December quarter production and sales report.
The company yesterday joined the cost cutting wave impacting its peers across the entire sector by slashing oil and gas exploration and production in the US, starting now, with the number of rigs used onshore in the US (mostly in its fracking business) scheduled to fall 40% to 16 by the end of June.
The company gave no further details, such as production and sales targets for its shale-based oil and gas, especially the liquids business, such as condensates which BHP has been focusing on now for the past two years. They are expected next month.
The cuts in oil and gas offset a 15% -16% rise in iron ore production and sales from its Pilbara mines in WA, and a big rebound in its coking coal operations in Queensland and NSW.
The oil and gas rout has forced BHP to respond by revealing impairments in the US (it impaired some of these shale assets by $US2.8 billion in 2012).
Those latest write-downs will be included in more than $US1.4 billion of impairment losses and extra tax charges flagged by BHP in yesterday’s statement.
"BHP Billiton expects Underlying attributable profit in the December 2014 half year to include impairment charges in the range of approximately US$200 million to US$250 million recognised as a result of the divestment of conventional petroleum assets in North Louisiana and unconventional gas assets in the Pecos field in the Permian,” the company said.
"The Minerals Resource Rent Tax (MRRT) in Australia has been repealed and was applicable until 30 September 2014. As a result, the MRRT deferred tax asset carried by the Group was derecognised and an income tax charge of US$809 million will be reported as an exceptional item in the December 2014 half year. The Group’s adjusted effective tax rate is expected to remain in the range of 30 per cent to 34 per cent in the December 2014 half year.
"On 12 November 2014, BHP Billiton announced that the review of its Nickel West business was complete and the preferred option, the sale of the business, was not achieved on an acceptable basis. As a result of operational decisions made subsequent to the conclusion of this process, an impairment charge in the range of US$200 million to US$350 million (after tax expense) will be recognised as an exceptional item in the December 2014 half year. At this time, Nickel West remains in the BHP Billiton portfolio and the Company continues to operate the business to maximise production, reduce operating costs and increase free cash flow,“ BHP said yesterday.
The final details will be released with the half year profit statement on the 24th of next month.
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BHP chief executive Andrew Mackenzie in yesterday’s statement and report confirmed that rig numbers in the US shale division would be cut by June 30 to cut costs, save money and reshape the business.
The shale division had 26 operational rigs at the end of December, and this will drop to around 16 rigs by the end of June. BHP indicated the remaining rigs would focus on the liquids-rich Black Hawk field in Texas, and not on the gas areas (gas prices this week fell 9% in the US) in the Permian and Hawkville fields. Drilling will be reduced to levels required to maintain licences on the gas acreage, which will be one rig.
The move is not a major surprise with scores of US shale producers cutting drilling and development programs, sacking staff, and hacking into non-operational costs.
BHP said its onshore exploration and development cost nearly $US2 billion in the December half year. That is looking more and more like a potential cost cut as BHP hauls back from its previously revealed plan to invest $US4 billion a year in the fracking sector until 2017-18.
BHP’s major contractor in US shale, Schlumberger, cut 9000 jobs last week because of expectations that oil and gas producers would reduce operations. Overnight an other big contractor, Baker Hughes, cut 7,000 jobs, even before its takeover by another rival, Halliburton which said overnight it would be cutting a similar number of jobs. BP last week cut 2,000 jobs in the North Sea as well.
Both Baker and Halliburton revealed impairments and write-down costs of well over $US100 million for the quarter, small compared with the $US1.7 billion from Schlumberger. BP will reveal a $1 billion charge in the 4th quarter when it reveals its latest figures in a few weeks.
On top of these cuts, BHP also revealed a 20% cut to its exploration program in the year to June.
"Petroleum exploration expenditure for the December 2014 half year was US$268 million, of which US$244 million was expensed. Total petroleum exploration expenditure for the 2015 financial year is now forecast to be US$600 million, a 20 per cent reduction from prior guidance. The program will remain focused on the Gulf of Mexico, Western Australia and Trinidad and Tobago. Onshore US drilling and development expenditure totalled US$1.9 billion in the December 2014 half year,” BHP said.
BHP said that it is continuing to try and sell its Fayetteville acreage (announced last October) "and will only pursue a divestment if full value can be realised, consistent with our long-term outlook for gas prices". With gas prices falling and the outlook weak, don’t expect a quick sale, seems to be BHP’s message.
Global crude prices have slid nearly 60% since June to trade at less than $US49 a barrel, as a result of weaker growth in demand for oil, the booming US shale production and Opec’s decision in November not to cut output. This has seen oil companies big, medium and small (and their suppliers) slash spending plans, abandon projects, cut staff and hunker down to try and ride out the slump.
Brent oil prices have more than halved over the past six months to be fetching $US46 a barrel overnight after another big slide ended a small rally late last week. West Texas crude prices are down a similar amount.
BHP stressed that it remained committed to its plan to demerge a company called South32 (containing nickel, aluminium and sub par coal and other mining assets), despite recent falls in commodity prices.
Looking at its shrinking list of projects, BHP said the Escondida Oxide Leach Area Project was successfully completed during the December 2014 quarter and the BMA Hay Point Stage Three Expansion project in Queensland loaded first coal on 12 January 2015, both on revised schedule and budget. The Escondida Oxide Leach Area Project will not be reported in future Operational Reviews.
At the end of the December 2014 half year, BHP Billiton had seven major projects under development with a combined budget of US$13.5 billion.
BHP said output in its Petroleum division rose 10% to 63.6 million barrels of oil equivalent in the December quarter. The company said the lower spending won’t curb output, maintaining its forecast production of 255 million barrels in the year to July, up from 243 million barrels a year earlier.
Quarterly iron ore production rose 16% to 56.4 million tonnes in the latest quarter from about 48.7 million tonnes a year earlier, it said. For the half year production was up 15% to 124 million tonnes, while guidance for the June 30 2015 financial year remains unchanged at 225 million tonnes.
Sales for the December quarter totalled 62.8 million tonnes, up sharply from the 53.8 million sold in the same quarter of 2013. For the half, sales jumped 18% to 126.10 million tonnes.
Like Rio, BHP dipped into its stockpiles and sold more iron ore than it produced – some 2.3 million tonnes. Rio’s was a more substantial 8 million tonnes.
BHP said it received an average free on board price of $US70 per wet tonne of iron ore in the six months, down 38% from a year earlier, it said. Rio’s average price was just over $US84 a tonne.
BHP’s copper production fell 9% to 423,700 tonnes in the quarter and 4% to 813,0000 tonnes in the half year and will dip further this half because of lower grades and other obstacles at some of its mines.
BHP said coking coal production at its own mines in NSW and the Queensland (BMA, half owned with Mitsubishi) mines, jumped 21% to 26 million tonnes in the half year after extensive changes. Energy coal production (thermal or steaming coal) rose 5% for the half year compared with the same period of the previous year, to 36.4 million tonnes.
BHP shares rose 2% to $28.05. The market is waiting for the profit statement and more details on the financial cost of cuts in the petroleum business.
