Photographer: Tomohiro Ohsumi/Bloomberg

BHP Sees Oil and Gas Rebounding Faster Than Metals, Coal

  • Producer considering investments of as much as $5 billion
  • BHP to decide on Mad Dog 2 investment in next six months

BHP Billiton Ltd. sees oil and gas markets rebounding faster than its mined commodities as it considers potential acquisitions and weighs as much as $5 billion in project spending.

The world’s biggest miner, which booked writedowns of $7.2 billion against its U.S. shale unit earlier this year, said recovering oil prices and efforts to lower costs are making investment opportunities more attractive.

BHP’s board will decide within six months on its investment in the BP Plc-operated Mad Dog 2 oil and gas project in the Gulf of Mexico, it said Wednesday in a statement. The company earlier flagged its share of the project at $2.5 billion. Additional investments of as much as $2.5 billion in existing project options are also being considered, Steve Pastor, the producer’s petroleum operations president, said in the statement.

“While currently well supplied, underlying fundamentals suggest both oil and gas markets are improving more quickly than our minerals commodities,” Pastor said. “Petroleum is well placed to maintain its position as BHP Billiton’s highest margin business and to grow its free cash flow contribution.”

Melbourne-based BHP’s petroleum unit, with operations in countries including the U.S. to Australia, had an average margin for earnings before interest, taxes, depreciation and amortization of 64 percent over the past 15 years, compared with 54 percent from iron ore, Macquarie Group Ltd. analysts wrote in a note Tuesday. The unit accounts for the second highest share of earnings after iron ore, according to data compiled by Bloomberg.

Oil has advanced about 11 percent since the Organization of Petroleum Exporting Countries agreed last week to cut production for the first time in eight years, with U.S. crude trading near three-month highs close to $50 a barrel Thursday. Petroleum is leading a commodities rebound, with prices poised for gains faster than metals and coal, BHP said Wednesday in presentation slides. 

BHP said it expects oil prices to continue to recover. Crude at a 13-year low of $27 a barrel in January wasn’t sustainable for the industry, Pastor said.

The low prices “didn’t make a whole lot of sense and it wasn’t necessary to rush after volumes in a case like that,” he said on a media call.

Mad Dog 2 is an economically attractive option with prices below $50 a barrel, Pastor said in the statement. The operation could enter production by 2022, BHP said in a separate presentation.

‘Volume Challenge’

“Ultimately, the challenge they have is on volumes,” Sydney-based Deutsche Bank AG analyst Paul Young said before the presentation. “They don’t have any major projects, any high-margin projects, coming through until the next decade.”

Output from BHP’s petroleum unit in the 12 months to June 30 is forecast to fall for a second consecutive year to between 200 million to 210 million barrels of oil equivalent, BHP said in July.

Population growth and rising incomes will lift oil demand to more than 100 million barrels of liquids per day by 2025, a third of which will need to come from new sources, Pastor said in the statement. Rising demand, projected field decline and the impact of investment deferrals mean there’s a significant opportunity to make investments in growth, he said.

BHP, the largest overseas investor in U.S. shale, said its onshore assets are currently generating cash and have significant upside if oil and gas prices improve as forecast. The producer acquired Chesapeake Energy Corp.’s Fayetteville assets for about $4.8 billion in 2011 and later that year completed a $12.1 billion takeover of Petrohawk Energy Corp.

Cash Flow

Shale assets in the Permian basin could become the largest source of production and free cash flow in BHP’s petroleum division within five years, Pastor said.

The producer struck oil at its Caicos deepwater exploration well in the Gulf of Mexico and plans to drill the nearby Wilding well in November, it said in the statement, adding it is “optimistic” about commercial development in the area.

The company sees the most value for mergers and acquisitions in conventional deepwater oil assets, Pastor said on the call.

“It needs to be in basins that we know both economically and geologically,” he said.

BHP’s Australian listed shares rose by 1.2 percent to A$23.13 at 1:34 p.m. in Sydney.

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