BHP Billiton Ltd. (BHP)’s Marius Kloppers, the best-paid chief executive officer among London-traded mining companies, will forgo his bonus after announcing $3.3 billion in charges on gas and nickel assets.
The value of BHP’s Fayetteville shale-gas holdings in Arkansas will be cut by $2.84 billion and its nickel sites in Western Australia by $450 million, the Melbourne-based company said yesterday in a statement. BHP, which paid $4.75 billion for the Fayetteville assets last year, said Kloppers and petroleum business CEO Mike Yeager won’t get paid a bonus for fiscal 2012 at their request.
BHP, which spent $20 billion in 2011 buying the shale deposits, joins BG Group Plc and Encana Corp. in writing down the value of the assets after natural gas prices fell to a 10- year low this year. Kloppers’ decision to not take a bonus follows a similar gesture by Rio Tinto Group CEO Tom Albanese and Chief Financial Officer Guy Elliott after Rio booked an $8.9 billion one-time charge on the value of its aluminum unit.
“The problem in the long run will always be the price that they paid for it,” Tim Barker, who helps manage investments at BT Financial Group Pty, including shares in BHP (BLT), said by phone. “There’s no doubt that the timing of the acquisition was perhaps not the best. That is something they’ll have to live with.”
BHP’s Kloppers, a 49-year-old South African who was appointed CEO in 2007, was paid a total of $11.6 million in salary, benefits and bonuses in the 2011 fiscal year. That made him the best paid CEO of the top-five European mining companies including Rio, Xstrata Plc, Glencore International Plc and Anglo American Plc, UBS AG said in a May 16 report.
Kloppers got a bonus in cash and shares of $4.7 million, according to BHP. Yeager was paid $6.6 million last year, including $2.75 million in cash and share bonuses, BHP said.
The writedown is less than what was expected by analysts. Citigroup had estimated a $3 billion to $5 billion cut and JPMorgan Chase & Co. said it had anticipated $3 billion to $6 billion.
“The market was already expecting large impairment charges in U.S. shale,” JPMorgan analysts Fraser Jamieson, Lyndon Fagan and Roger Bell wrote in a note to clients. “However, with the impairments coming in at the lower end of expectations, BHP may slightly outperform peers in the wake of this announcement.”
BHP gained 3.3 percent to close at 1,918 pence in London trading yesterday. It fell 2.3 percent in Sydney. BHP is due to report full-year earnings on Aug. 22. BlackRock Inc., the world’s biggest asset manager, said in March it had trimmed holdings in BHP, citing the shale deals as a concern.
“These are difficult times, particularly for those companies and their shareholders who are being affected by global uncertainty,” BHP Chairman Jac Nasser said in the statement. “We are fortunate to have Marius’ leadership, together with a strong management team supporting him, in these challenging times.”
U.S. gas prices have declined about 38 percent since Kloppers announced the company’s entry into shale on Feb. 22 last year with the purchase of the Fayetteville assets. He said yesterday the charges were “clearly disappointing.”
The success of the shale venture is important for Kloppers as it came after he had three deals totaling more than $100 billion aborted or rejected in the past four years, including hostile bids for Rio and Potash Corp. of Saskatchewan Inc.
“They’ve been unfortunate in trying to put a number of their acquisitions to bed for a number of reasons,” said BT Financial’s Barker. “The scope of acquisition that BHP needs to make is difficult to make because of the issue of market power.”
Energy companies operating in the U.S. have been struggling to adjust to lower prices since a glut in supplies from booming shale production deflated gas futures. Producers have cut gas output, shifted drilling to look for crude and curtailed spending to compensate.
BHP last year bought Chesapeake Energy Corp. (CHK)’s Fayetteville assets and spent $14.9 billion, its biggest acquisition, buying Petrohawk Energy Corp. BHP said in May it would assess the value of its U.S. shale gas investments, while cutting back on drilling gas until prices recover.
“We were surprised to see the Petrohawk assets unaffected as a result of the assessment,” JPMorgan said. They had expected the value of the Haynesville asset, acquired from Petrohawk, to be written down, JPMorgan said.
BHP’s Nasser said the board supports Kloppers and Yeager in shifting current drilling from the dry gas fields in Fayetteville and Haynesville to the liquids rich fields in the Permian and Eagle Ford.
“Hopefully, what they can do now is continue to focus on the liquids component of these assets in order to maximize the returns on this investment,” Phillip Chippindale, a Sydney- based analyst at Royal Bank of Scotland Group Plc who expected a writedown of about $3 billion, said by phone.
Shale-rock formations require injection of water, sand and chemicals to release gas. Environmental groups have opposed using the process called hydraulic fracturing, or fracking, because of concerns of air pollution and tainted water supplies. Producers are also facing increased state and federal regulation.
BHP in February cut the mining rate at its Nickel West operation in Western Australia by 30 percent, citing lower metal prices and the high Australian dollar. Nickel prices traded in London have declined about 36 percent over the past year because of growing supply and slowing demand. BHP said yesterday it had cut the value of the unit because of margin deterioration.
BHP may seek to sell its remaining nickel assets, “however this is likely to be challenging in the current environment,” JPMorgan said.