Ahead of its production and exploration report next week and the annual profit release next month, BHP Billiton (BHP) has revealed some financial housekeeping in its US shale gas business.
The company revealed another write-down in the value of some of the assets in Texas – this time $US2.8 billion before tax.
It was the third write-down in the business since BHP spent $US20 billion buying shale oil and gas exploration and production assets in the US.
Most of the write-down is in the Hawkville shale, which is dominated by gas rather than the more lucrative liquids.
This action follows a $US328 million write-down on the Permian field in February and the $US2.84 billion impairment on the gas parts of the US shale division three years ago next month in 2012.
The news saw the company’s share price dip 1.3% to $26.75.
BHP 1Y – More shale pain for BHP
The collapse in US gas prices since 2011 (caused by surging production of shale gas from fracking) has forced many producers to move from gas to the production of liquids – mostly light oil and condensates (which is a big producers of condensates from some of its area). The Black Hawk field in southern Texas is the biggest onshore field for BHP.
And that switch has helped power the surge in US oil production since 2011 to the point where it’s running at more than 9.2 million barrels a day – the highest for decades. And in turn this soaring output helped trigger the collapse in oil prices a year ago, which continue at the moment.
US gas prices though haven’t moved – even in the two very cold US winters of 2013-14 and 2014-15, but in April gas displaced coal as the primary fuel for US electricity production with a 31% share, compared to coal’s 30% share. The surging gas production has driven US coal prices lower and all devastated the industry, triggering mine closures, layoffs and company collapses.
BHP’s $US20 billion investment in 2011 (the largest part of that investment was buying the Petrohawk company for $US18 billion) was originally targeting shale gas, but the company has focused more on shale liquids in recent years. That strategy has ensured the Black Hawk field in south Texas is the flagship acreage of the division.
In yesterday’s statement, BHP said, "The gas focused Hawkville field accounts for the substantial majority of this charge reflecting its geological complexity, product mix, acreage relinquishments and amended development plans. The remainder relates to the impairment of goodwill associated with the Petrohawk acquisition.
"Following this impairment, the Group’s Onshore US business will have net operating assets of approximately US$24 billion. The value of this business is supported by ongoing cost reductions and improving well performance which help offset increased commodity price volatility and lower near term capital expenditure.
Consistently positive results from the appraisal and development of the Permian have also unlocked significant value and we now see the ultimate potential of this field at over 150 kboe/d (up from our previous estimate of 100 kboe/d),” the company said.
BHP Petroleum President Tim Cutt said “While the impairment of the Hawkville is disappointing, it does not reflect the quality of our broader Onshore US business. The Black Hawk continues to exceed expectations, the Permian offers significant upside across multiple zones and the Haynesville, one of the industry’s premier dry gas positions, provides an excellent development option as market conditions improve. With industry-leading drilling costs and recoveries, we are well positioned to realise significant value for shareholders as we develop our high-quality resource base.”
BHP said it plans to invest US$1.5 billion in onshore US oil and gas in the 2016 financial year “which will support a development program of 10 operated rigs”.
"At an oil price of US$60 per barrel (West Texas Intermediate) and a gas price of US$3.00 per Mscf (Henry Hub), the Group expects its Onshore US business to be free cash flow positive in the 2016 financial year. Associated production guidance will be provided in the June 2015 Operational Review to be released on 22 July 2015,” the company said.
BHP added that the broader carrying value assessment of the Group’s assets will be finalised in conjunction with the preliminary financial results to be released on August 25.
