According to Ross Kelly and Robb M. Stewart of WSJ Australia, BHP Billiton Limited (NYSE:BHP) has announced that they may write down shale assets in the country as slumping prices make profit margins shrink. BHP owns 1.6 million acres that covers parts of Texas, Louisiana and Arkansas. Most of these territories were inherited from the company’s purchase of Petrohawk Energy ((now known as Halcon Resources Corporation (NYSE)?) for $12 billion and BHP’s purchase of the Fayetteville shale from Chesapeake Energy Corporation (NYSE:CHK) for $4.75 billion.
The problem now is that some analysts are worried about BHP’s options in the US shale reserves after natural gas just fell through $2. Although prices have rebounded a little over $2, it is still nothing compared to the $4,$5 we saw at the beginning of 2011.
ValueWalk's Raul Panganiban interviews Joseph Cioffi, Author of Credit Chronometer and Partner at Davis + Gilbert where he is Chair of the Insolvency, Creditor’s Rights & Financial Products Practice Group. In the interview, we discuss the findings of the 3rd Annual report. Q2 2021 hedge fund letters, conferences and more The following is a computer Read More
Interestingly enough, Mike Yeager, head of BHP’s energy department, has said that the firm will devote 85-90% of its spending for US energy hubs as the company now is focusing on extracting liquids. Here is what Mr. Yeager said about the subject:
“On the 30th of June, at the end of our fiscal year, we will have to do an accounting snap-shot,” Mr. Yeager told reporters, adding the analysis will include a consideration of what BHP paid for the assets, forward investment plans and costs, and the company’s view on the direction of energy prices” (WSJ Blog).
The good news is that according to Mr. Yeager, BHP’s actual spending is less than the forecasted $4 billion on US onshore locations. The prospected locations include the Eagle Ford shale and Permian shale and the company expects to be extracting 1.5 billion barrels of liquid.
BHP is adapting to the conditions of the market place. Rather than continuing its current regiment and losing money, the company adapts and decides to start drilling for liquids in other prominent shale locations around the country. Mr. Yeager also stated that he believes the company’s target of 225 million barrels of oil will be met or at least very close to it.
The bottom line is that BHP was faced with an unfortunate situation. After spending over $16 billion on shale acreage, natural gas prices dove to some of the lowest levels that we have seen in a decade. Luckily, the company had a plan and changed its plans. They decided to focus more on liquids and will be concentrating on drilling as prices are more attractive, rather than simply continuing the original losing option.