BHP Billiton Ltd. plans to decide at the end of next month whether to write down the value of the U.S. shale gas assets it acquired for $20 billion, while cutting back on drilling natural gas wells until prices recover.
Australia’s largest oil and gas producer will take an “accounting snapshot” as of June 30, when its financial year ends, J. Michael Yeager, chief executive officer of BHP’s petroleum division, said today at a media briefing in Adelaide when asked about potential writedowns.
BHP’s foray into U.S. shale gas has been hit by a plunge in natural gas prices to a decade low, prompting Citigroup Inc. to say in a May 1 report that the mining and energy company may cut the value of the assets by as much as $5 billion. BHP has increased production of higher-priced liquids from its shale fields following a similar decision by Royal Dutch Shell Plc.
“It looks like they have paid a lot of money for those shale assets,” Steven Robinson, a Sydney-based senior investment manager at Alleron Investment Management Ltd. who helps oversee about A$2 billion ($2 billion) including BHP shares, said by phone. “What you want to see from BHP is the investments that they’re making are generating at least the same sort of return on investment as their existing operations.”
U.S. gas prices have declined about 46 percent since Marius Kloppers, BHP’s CEO, announced the company’s entry into shale on Feb. 22 last year with the $4.75 billion purchase of the Fayetteville shale assets from Chesapeake Energy Corp. The world’s biggest mining company also acquired Petrohawk Energy Corp. for $15.1 billion, including debt.
The purchases followed three deals of more than $100 billion that were aborted or rejected in the past five years under the leadership of Kloppers, including hostile bids for Rio Tinto Group and Potash Corp. of Saskatchewan Inc.
“There have been a lot of investments that BHP has made over a very long timeframe that haven’t necessarily been that positive,” said Robinson. “It’s BHP’s traditional assets that are earning all the money for them.”
Petrohawk reported a $55 million loss in the three months to March 31, wider than the $29 million loss a year earlier, the company said May 11. BHP’s net income fell 5.5 percent to $9.9 billion in the six months ended Dec. 31, the Melbourne-based company said Feb. 8.
BHP boosted liquids production from its onshore acreage in the U.S. by 35 percent in the quarter ended March 31, compared with the previous three months, the company said in April.
The company plans to recover about 1.5 billion barrels of liquids in the U.S., or 500 million barrels more than what BHP expected in November, Yeager said today.
BHP expects to spend “a little less than” the $4 billion it previously targeted for its onshore U.S. operations this financial year as it shifts toward liquids, Yeager said. BHP plans to increase that investment next year, he said.
“Gas prices could stay down, they could get back up, but whatever they do, we will have an advantaged position we think over the longer term,” he said. “We can drill wells that do not depend on gas prices for their economics for a minimum of five years, maybe 10, because of our endowment of liquids.”
While BHP is also considering increasing its stake in some petroleum liquids acreage in the U.S., it would be “impractical to make another large acquisition, Yeager said.
‘‘There’s running room in the plays that we’re already in,” he said. However, “we’re not doing anything of a material nature until we get more comfortable that we’ve got bedded down what we have.”
Though the company is scaling back drilling of wells to extract gas -- released through a process where shale-rock formations are injected with water, sand and chemicals -- the commodity will be valuable in the long term, Yeager said.
“The long term view we have is it’s irrefutable that this is going to be valuable,” Yeager said. “If we have to take an accounting snapshot here, we hope everyone knows we’ll take another accounting snapshot in the future. When circumstances change, whatever action we take now may get reversed.”