BHP (BHP)

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BHP chief Andrew Mackenzie promises progressive dividend payouts
THE AUSTRALIAN OCTOBER 29, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
BHP Billiton has come as close as it can to declaring that its $US6 billion-plus ($6.8bn) commitment to progressive dividend payouts is sacrosanct, despite the collapse in commodity prices undoing the group’s boost from production and productivity gains.

The commitment to a progressive dividend policy — payouts do not go backwards — has come under increased scrutiny this year, first from the 40 per cent plunge in iron ore prices and more recently the 23 per cent slump in oil prices.

Both are key profit earners for the company. Weakness in their price, and that in other key commodities for the group, has fed in to expectations that 2015 earnings before interest and tax could fall by as much as $US2bn to $US21bn.

The $US6bn-plus dividend commitment comes on top of forecast 2015 capital expenditure of $US14bn, raising investor concerns that the payout policy is under threat. But at a Monday night (London time) briefing of analysts, BHP hosed down the concerns.

Chief executive Andrew Mackenzie said BHP was “fundamentally committed to the progressive dividend’’.

“It is the minimum expectation that you as shareholders should have, and we are arranging ourselves to provide that kind of guarantee with real confidence and the way we handle everything,’’ Mr Mackenzie said.

Analysts suspect that headroom for maintaining the progressive dividend will come from more cuts to the group’s capex program should commodity prices continue to weaken. BHP has another meeting with analysts in November and Mr Mackenzie said more would be said then about the capex outlook.

But he did say that it would be less than $US14bn. “By how much, I don’t know yet. We will wait and see. We will probably not be spending up to our $US14bn previously announced ceiling,’’ Mr Mackenzie said in an unscripted comment at the end of the formal presentation to analysts.

In earlier charts presented to the briefing, BHP indicated that its capex in 2016 could be as low as $US10bn, which is only slightly above its sustaining capex numbers. Such a fall in itself would take the pressure off meeting the progressive dividend commitment. BHP’s annual dividend has risen from $US1.12 a share in 2012 to $US1.16 in 2013, $US1.21 a share in 2014 and on UBS forecasts, $US1.26 a share for 2015.

BHP chief financial officer Peter Beaven told the briefing that while there was volatility in the commodities markets, BHP was a company in great shape.

Besides, BHP was doing “some super work on productivity: $US2.9bn out already, with $US3.5bn to go, and there is additional work and thought going into that beyond the $US3.5bn for the longer term’’.

Mr Beaven said capex reduction already in place was “very much driven to improving productivity and retaining our ability to grow the company and therefore our ability to pay the progressive (dividend) in the future’’.

BHP also revealed that it was looking to offload its Fayetteville shale gas assets in Arkansas, which were acquired for $US4.7bn in 2011, only to be written down in value by $US2.8bn the following year. The writedown was prompted by lower gas prices, with Fayetteville not having the revenue boosting “wet’’ gas that BHP’s other onshore shale assets in the US have.

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BHP Billiton tests US oil export ban
DOW JONES NOVEMBER 05, 2014 10:12AM

BHP Billiton will soon sell US oil abroad without explicit permission from the US government, another sign that Washington’s decades-old federal ban on crude exports is crumbling.

The Australian-based resources group’s (BHP) deal to sell about $US50 million of ultralight oil from Texas to foreign buyers without formal government approval is likely to be only the first of many such moves as energy companies seek new markets and higher prices for the surge of crude now pumped in the US.

Washington has been sharply divided over whether to allow US oil exports, which have been restricted since the Arab oil embargo in the 1970s. Big oil companies including Exxon Mobil Corp have called for an end to the ban, saying that overseas sales would create US jobs and improve the balance of trade.

But opponents have said they fear that exports would cause gasoline prices to rise in the US, hurting consumers and angering voters.

OIL PRICE: At a four-year low

BHP said it had signed an agreement to sell 600,000 barrels of oil that hasn’t gone through the traditional refining process that turns oil into gasoline and other fuels. The company declined to identify the buyers for the ultralight oil, known as condensate. The few similar cargoes that have been exported with government approval have gone to Asia and Europe.

“We took the necessary time to thoroughly examine the issues involved and ensure the processed condensate was eligible for export,” the company said.

The Commerce Department didn’t immediately respond to requests for comment. Department officials there have maintained that there has been no change to US oil export policies.

For nearly 40 years the US has allowed exports of refined fuel, such as gasoline and diesel, but not overseas shipments of oil itself except in rare cases. Even those, including limited crude sales to Canada, have required a special permit from the US Commerce Department.

As The Wall Street Journal reported in June, two Texas energy companies received confidential rulings from the department that allowed them to export sell a lightly processed version condensate even though it hadn’t been handled by a refinery.

BHP plans to sell the same kind of oil to Asia even though it doesn’t have a government ruling.

Global oil prices have dropped sharply since late June as companies pump more crude, from Libya to North Dakota. Meanwhile, worldwide demand for fuels is tepid. Lower oil prices translate into cheaper gasoline and diesel, putting money in the pockets of consumers.

But energy companies with substantial investments on the line worry that low crude prices will force some of them to stop drilling. They have grown increasingly eager to circumvent the ban on international sales of US oil and gain access to new markets.

Refiners and other buyers of light oil across Asia are interested in American condensate so they can diversify their supply from the Mideast.

The companies that received special permission from the US government to export minimally processed oil are Enterprise Product Partners LP, a Houston-based pipeline and oil-storage operator, and Pioneer Natural Resources Co., a Dallas-based oil producer. They used their rulings from the Commerce Department’s Bureau of Industry and Security to ship the first tanker of condensate overseas at the end of July.

BHP sold some ultralight oil from its Eagle Ford fields in South Texas to Enterprise for that first cargo and has participated in some of the pipeline company’s more recent exports, which will approach 4 million barrels by year-end.

In the process, BHP said it learned the rules for lightly processing the ultralight oil, which were spelled out in Enterprise’s ruling from the government.

Other energy and trading companies have applied for private rulings from the federal government, which hasn’t approved any since the northern spring.


Dow Jones

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BHP strategy questioned after exit from Stampede oil project
THE AUSTRALIAN NOVEMBER 08, 2014 12:00AM

Matt Chambers

Resources Reporter
Melbourne

BHP's big export breakthrough

BHP Billiton’s strategy of cash preservation over growth has been questioned after the big miner gave away a 20 per cent stake in a $US6 billion ($7bn) Gulf of Mexico oil project its operator says will deliver handsome returns.

Last month, oil giants Hess, Chevron, Statoil and China National Offshore Oil Corp approved the Stampede project, which BHP exited in April. The exit was not announced to the market at the time, despite Deutsche Bank valuing the stake at $US450 million.

The project approval tipped Deutsche Bank analyst Paul Young off to the fact BHP no longer had an interest in the project, and he notified clients of this on Thursday night.

The stakes of each of the four remaining partners has risen to 25 per cent from 20 per cent, indicating BHP’s stake was split among them when BHP walked away.

Mr Young said the decision not to participate in the Stampede project, which includes the Knotty Head field discovered in 2005, and last month’s decision to put the onshore Fayetteville gasfield in Arkansas on the market raised questions about BHP’s strategy.

“We valued BHP’s (Stampede) stake at $US450m, generating an internal rate of return of 20 per cent — a good enough project for BHP in our view,” he said.

“The decision to walk away from Stampede and also put the 25 per cent-plus internal rate of ­return Fayetteville field up for sale appears to be based on the drive to reduce group capex, with value now being sacrificed to maximise free cashflow.”

BHP revealed its exit of the field in its annual report in September in the “business overview” section, but it was not picked up by any media or analysts.

In its annual report, BHP said it withdrew from the project after completing development planning. This may indicate BHP did not stay with the project because it could not do so under its self-­imposed capital spending ceiling of $US14bn after a planned demerger next year.

The withdrawal was also not mentioned in the company’s March or June quarter reports, but BHP’s full-year results mentioned a $US184m writedown on “minor Gulf of Mexico assets”.

After approving Stampede, which has 300 million barrels of reserves and will produce 88,000 barrels of oil a day, Hess chief John Hess said the project would provide strong returns at oil prices of $US80 a barrel.

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BHP Billiton upbeat on Olympic Dam plan
BUSINESS SPECTATOR NOVEMBER 20, 2014 11:27AM

Sarah-Jane Tasker

Reporter
Sydney


Iron ore in the pits
BHP Billiton’s plan to expand its massive Olympic Dam mine by using a heap-leach process is showing “promise”, according to chief Andrew Mackenzie, giving hope to South Australia more than two years after the world’s largest miner abandoned a $30 billion expansion at the mine.

Mr Mackenzie, speaking to shareholders at BHP’s (BHP) Australian annual meeting in Adelaide this morning, said that if the heap leaching trials under way at Olympic Dam proved successful, adding they were showing “promise”, then the miner would use the technology and phased expansions of the underground mine to further increase Olympic Dam’s output.

South Australia had been banking on the original $30bn expansion plan to underpin an economic surge and any hint of success with the new low-cost option would be closely watched.

Mr Mackenzie said that throughout the process the state and federal governments had been supportive and created an environment that was “highly conducive” to business investment.

The company also used the meeting to again outline its view on climate change, which comes just after the issue was widely discussed on the sidelines of the G20 after US President Barack Obama gave a speech on climate change during his visit to Australia for the economic forum.

Australia had resisted putting climate change on the G20 agenda, arguing it was an economic forum and there were other forums to discuss climate change.

BHP chairman Jac Nasser said today that climate change was a global challenge posing a significant risk to the environment and therefore social and “economic” development.

Mr Nasser said the miner’s business strategy depended on sustainable global growth, adding that it was clear this would require substantial reductions in greenhouse gas emissions.

He said that would, in turn, change the structure of energy markets around the world.

He also again outlined that the world’s largest miner supported a price on carbon.

“But a carbon price alone will not be sufficient to drive the pace and scale of the global response required,” he said.

The chairman of the world’s largest miner also outlined the benefits of its planned $17 billion demerger of its non-core assets.

He said the company had made good progress in recent weeks and that the de-merger was on track.

“We have received a number of the more significant regulatory approvals, including from Australia’s foreign investment review board and the Australian Taxation Office and we are progressing well on those that remain outstanding,” he said.

On the demerger, Mr Nasser said that the company could reduce costs and improve the productivity of its remaining assets more quickly.

“This means we should generate stronger growth in free cash flow and a superior return on investment,” he said.

BHP expects to release all shareholder documentation with full details of the de-merger in March, with a shareholder vote scheduled for May.


Mr Nasser also talked up BHP’s potential fifth major commodity, potash, as driving food production through its use as a fertiliser.

Despite the end of the mining boom and urgent calls from the government and the Reserve Bank for other sectors to step up, Mr Nasser highlighted how important the resources industry remained to the Australian economy.

“The industry’s export earnings increased by 12 per cent to $US195 billion, representing more than half of Australia’s export earnings,” he said.

“There are very few industries in Australia that have world scale and are globally competitive. The resources industry is one of them; an industry that is ready to lead Australia’s prosperity for decades to come.”

BHP’s shares were 56c lower at $32.11 at 11:19am (AEDT) in trading on the Australian Securities Exchange.

The stock has fallen about 18 per cent since August.

With AAP

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Chinese economy slowing: BHP
MICHAEL RODDAN AND AAP NOVEMBER 20, 2014 12:00PM

BHP Billiton is eyeing a shareholder vote on its multi-billion dollar demerger in May 2015, and has warned China's economic growth rate in the medium term will gradually decline from current levels as the country's economy continues to mature

BHP chairman Jac Nasser told shareholders at the company's annual general meeting the Chinese property sector is slowing but other sectors were showing resilience, and pointed to the growing energy market as an area of opportunity.

Mr Nasser said in the next 20 years around 1.7 billion people are expected to access electricity for the first time, and that BHP's portfolio would benefit as the demand for energy grows.

"We are represented across the major energy commodities in the global energy mix, including oil, natural gas, uranium and high-quality energy coal," he said.

He said he expected China's economic growth to come in above 7 per cent.

At 11.20am (AEDT) BHP shares were 1.68 per cent lower at $32.12, against a benchmark index slide of 0.44 per cent.

Although resources investment in Australia has slowed, production has increased. Mining remained the main contributor to Australia’s economic growth in the 2014 financial year, Mr Nasser said.

"China, together with other emerging markets, will remain a major driver of global growth. This will drive increased demand for natural resources into the future."

Overnight, the iron ore price slumped a further 3 per cent to $US70 a tonne, down from its previous close of $US72.10 and off over 7 per cent across the past two trading days.

Demerger to benefit shareholders: Nasser

Mr Nasser said the rationale for the split - which will demerge BHP's aluminium, manganese, silver and some coal and nickel assets - was that BHP's portfolio had evolved into what the company saw as two distinct companies.

"Our strategy was to direct capital to projects in businesses that delivered the highest returns. This strategy has served our shareholders well," Mr Nasser said.

"US$1,000 invested by you in BHP Billiton 10 years ago is worth US$3,600 today.

"We see benefits for both companies and for all shareholders."

Mr Nasser said BHP can reduce costs and improve the productivity of its largest businesses more quickly if the demerger goes ahead.

"The new company will benefit from its own strategy and systems that will be tailored for a business of its scale," he said.

Mr Nasser said an extraordinary general meeting was planned for May 2015 so shareholders could vote on the demerger.

Shareholders in March will receive documents with full details of the proposed demerger.

Mr Nasser also talked up BHP's potential fifth major commodity Potash, as driving food production through its use as a fertiliser.

Mackenzie focuses on productivity

Chief executive Andrew Mackenzie focused on the importance of lifting productivity, which he said was a major driver of BHP lifting profitability by 10 per cent to $US13.4 billion in 2013/14 despite falls in commodity prices.

He also defended the company's payment of taxes, saying it paid its fair share - $US9.9. billion in taxes and royalties last year - amid a focus on tax avoidance by large global companies recently.

A key focus for South Australia, which is hosting the AGM, is BHP's plans for expanding the massive Olympic Dam which were shelved two years ago.

The company was successfully developing heap leaching technology to process metals at Olympic Dam and would update the South Australian government on progress.

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BHP defends expansion strategy saying iron ore margins still good
THE AUSTRALIAN NOVEMBER 21, 2014 12:00AM

Sarah-Jane Tasker

Reporter
Sydney

Iron ore in the pits
Iron ore in the pits
Supplied Editorial AAPBHP Billiton CEO Andrew Mackenzie and Chairman Jac Nasser at the AGM in Adelaide yesterday. Source: AAP < PrevNext >
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Iron ore in the pitsSupplied Editorial AAP

BHP Billiton, the world’s largest miner, is not concerned with the five-year-low iron ore price, saying its West Australian operations are still making a good margin, as it defends its expansion strategy in an oversupplied market.

Chief executive Andrew Mackenzie said, after the miner’s annual general meeting in Adelaide yesterday, that despite the price of the steelmaking commodity hovering just above $US70 a tonne, the miner’s iron ore division was still one of its most profitable businesses.

BHP and its main rival, Rio Tinto, recently came under fire from West Australian Premier Colin Barnett, who questioned their expansion strategies and ­accused the world’s largest iron ore producers of “seemingly acting in concert” to keep the price at low levels.

Jac Nasser, chairman of the global miner, hit back yesterday, saying the capacity additions were not “secret” and added that the company’s iron ore expansion plans had been “long pipeline” ­investments.

“They don’t creep up on you; they get approved by many people in the process including government regulators and government,” Mr Nasser said.

Mr Mackenzie added that the company had not had an approval of an iron ore expansion project by its board since 2011.

“Our company has been very clear that the time for massive ­expansions of iron ore is over and we have shifted our investment into the energy sector, predominantly copper and petroleum, and we started doing that three years ago,” he said.

“We have been incredibly successful with productivity in our iron ore business and that means we can produce a lot more than we originally thought we would be able to do, both from long-­established assets and stuff we have subsequently invested in, and that is something we will continue with.”

Mr Mackenzie added that the miner was ready for the low prices and had been clear that today’s level was what it expected for the longer term, but he did say the rapid fall below $US100 a tonne nine months ago was unexpected.

The diversified miner used yesterday’s AGM, following its meeting in London last month, to update shareholders on the company’s planned $17 billion merger of its non-core assets.

BHP said it expected to release all shareholder documentation with full details of the demerger in March, with a shareholder vote scheduled for May.

Mr Nasser told investors that the company had made good progress in recent weeks and that the demerger was on track.

“We have received a number of the more significant regulatory approvals, including from Australia’s Foreign Investment Review Board and the Australian Taxation Office and we are progressing well on those that remain outstanding,” Mr Nasser said.

He said that, through the demerger, the company could reduce costs and ­improve the productivity of its ­remaining ­assets more quickly.

“This means we should generate stronger growth in free cashflow and a superior return on investment,” he said.

The market has widely debated a potential share buyback by the mining major, but Mr Mackenzie made it clear yesterday it was not a priority for the company.

He said there was a list of other items he and his team were focused on, such as ensuring the balance sheet remained strong so it could invest and pay the progressive dividend through the cycle.

Mr Mackenzie said the board “might” consider a buyback only after the list of other priorities was ticked off. He added that looking after the dividend was the No 1 imperative for the board and the management team.

“As things sit we feel the dividend at its current level is well covered,” he said, despite lower commodity prices in its key products.

BHP also updated shareholders on its Olympic Dam expansion plans; Mr Mackenzie highlighted yesterday that the heap-leach process it was trialling was showing “promise”.

The company shelved a “big-bang” $30bn expansion of the South Australian copper, gold and uranium mine two years ago and is assessing smaller expansions, it is hoping to use the more cost-effective heap-leach process at the site.

Mr Mackenzie said that if the heap-leaching trials proved successful, then the miner would use the technology and phased expansions of the underground mine to further increase Olympic Dam’s output.

South Australia had been banking on the original $30bn expansion plan to underpin an economic surge and any hint of success with the new low-cost option would be closely watched.

“We are about halfway through the testing period to know if it will work,” he said.

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Dividend promise squeezes BHP cashflow
THE AUSTRALIAN NOVEMBER 22, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne

Iron ore in the pits
Dividend promise squeezes BHP cashflowIron ore in the pits
SHARE price slumps forced by the collapse in key commodity prices have created a most unusual situation for major resources companies BHP Billiton and Rio Tinto — they have become yield plays in a low-yield world.

Yields from the pair do not match those of the banks, but at 4.4 per cent for BHP and 3.9 per cent for Rio (based on the most ­recent annual dividends, yesterday’s share price close and exchange rates), they are now not all that far behind.

Their current yields compare with a 2.8 per cent historic average, but it is not a badge of honour given the growth in yield simply reflects the sharp fall in their share prices of late, due primarily to the 48 per cent collapse in the iron ore price since the start of the year.

Traditionally, investment in the resources sector has been viewed as a capital growth story rather than an income story.

That it has taken the sharp fall in share prices to turn BHP and Rio into relatively high-yield plays is somewhat ironic, given the companies have been under the pump from investors for less investment and increased dividend payout ratios in the past couple of years.

But the bigger question now is that, given the severity of the iron ore price fall, and in BHP’s case the oil price slump, how sustainable are the dividend payments from the companies now that their free cashflows are being squeezed?

BHP’s annual dividend for 2014 of $US1.21 a share required a payout of more than $US6 billion ($6.9bn). What’s more, the company holds its “progressive’’ dividend policy to be sacrosanct.

It is a policy that seeks to steadily increase or at least maintain the dividend in US dollars at each half-yearly payment.

The growth in ­annual dividends from US26c in 2004 to $US1.21 a share for 2014 gives it a record that not even the global financial crisis messed with, as it did with Rio.

But the pressure is on because of the commodity price slump. A report by Credit Suisse found that, at current spot prices, BHP would need to pull some levers to ensure the sustainability of the progressive dividend strategy. It said BHP would need to bring its 2016 financial capital expenditure in at the bottom of the guidance range, implying few new project approvals. Alternatively it would need to bank $US4bn in asset sales (which now looks less likely given the failed sales process for Nickel West), or it would have to let net debt drift higher to $US30bn. One of the complicating factors for BHP — as its juggles its progressive dividend commitment against an insistence on maintaining a “solid A’’ credit rating throughout the commodities cycle — is that it is demerging a collection of assets into NewCo.

While second-rate compared with its four pillars of iron ore, petroleum, copper and coal, the assets in the new company are capable of generating free cashflow of an estimated $US500m, funds that BHP could have called to meet its progressive dividend commitment.

The company also said at the August announcement of the demerger that it would not be adjusting or rebasing the progressive dividend base to account for the lost free cashflow, further increasing the pressure to at least hold dividends in the face of lower commodity prices.

The pressure can be taken away by dropping the progressive dividend commitment. But that is not on the cards, judging by a statement by chief executive Andrew Mackenzie after the annual meeting in Adelaide this week.

“We run a progressive base dividend, and I’ve been speaking to the markets, and I think we’re very clear that in everything we’re able to do, and the levers we have, looking after the dividend is the No 1 imperative for the board. As things currently sit, we feel that the dividend at its current level is well covered.’’

Credit Suisse reckons that is the case at Rio, even if current spot commodity prices and exchange rates persist. “Our modelling says that Rio could still generate around $US1bn per annum of free cashflow post a rising dividend in FY210-2016.’’

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Petrol exposure hurts BHP as Rio prospers
THE AUSTRALIAN DECEMBER 02, 2014 12:00AM

Matt Chambers

Resources Reporter
Melbourne
A day in the life on the Cobia Oil Rig in the Bass Straight.
BHP’s entry into US shale involves $US4bn a year of capital expenditure. Picture: <span class="creditattribution">Eddie Seal</span> Source: News Limited

BHP Billiton’s share price and ­future plans are being hit by what just three months ago was still its strong point against rival Rio Tinto — its exposure to oil through its Houston-based petroleum business.

While Rio’s reliance on iron ore has been lambasted in recent times, and there has been no sign of improvement in the outlook for the steelmaking ingredient, Rio’s shareholder returns are down by just 4 per cent since June 30, in line with the broader sharemarket.

BHP shares in that time slumped 19 per cent to their lowest since the global financial crisis as production from the US shale oil sector, on which the miner has spent more than $US30 billion since 2011, became the main factor in a dramatic 30 per cent ­collapse in oil prices in the past three months.

The rapid change in the fortunes of the oil market and BHP was highlighted yesterday by analysts at Citi, who lowered their iron ore and oil forecasts and chopped $US12.4bn ($14.57bn) from the combined net profit of BHP and Rio over the next two years. BHP’s hit was $US8.8bn.

On top of increased exposure to oil prices, BHP’s entry into the US shale sector through $US20bn of acquisitions has brought it an ongoing $US4bn a year capital expenditure.

While chief executive Andrew Mackenzie said BHP should rein this in a bit, the ongoing spend is a barrier to near-term increased shareholder returns that Rio, which last week made a commitment to materially increased capital returns, does not have.

“It would appear that capital management is off the agenda for BHP for a while, as we do not expect debt to reduce significantly by the end of 2015-16, making any capital management a 2016-17 option at the earliest,” Citi analyst Clarke Wilkins said after slashing BHP earnings forecasts by 25 per cent this year and 35 per cent next year.

Despite the cuts, Citi upgraded BHP to a buy because shares, which yesterday lost $1.65, or 5.3 per cent, to close at $29.27, have slumped so much recently.

Citi downgraded Rio earnings 25 per cent for calendar 2015 and 21 per cent in 2016.

But Rio Tinto’s plans to slash capital spending and focus on gearing target of 20 to 30 per cent, rather than keep its current credit rating, mean returns are still on the table.

“With the unequivocal commitment to materially increasing cash returns to shareholders in 2015, gearing looks set to rise from the 22 per cent (at the half-year),” Mr Wilkins said.

He noted that Glencore’s interest in taking over Rio looks to have sharpened the company’s focus on maximising shareholder returns.

The pain that sliding oil prices can reap on the bottom line of BHP’s petroleum unit was evident in a recent JPMorgan report that lowered oil price forecasts by about $US30 a barrel to $US81 in 2016 and $US83 for the year after.

That move, which still sees oil prices bouncing back from current levels of $US66, slashed BHP’s forecast 2014-15 petroleum earnings before interest and tax from $US7.1bn to $US4.6bn and the following year from $US8.6bn to $US4.9bn.

The fall also, in JPMorgan’s assessment, removes oil and gas as BHP’s top earner before interest and tax next year, putting it in third place behind iron ore and copper.

The sliding oil price will also cut costs at both BHP and Rio as diesel bills come down, but this has not yet been factored in to estimates to any great extent.

That could change if Rio comes good on a promise to reveal its sensitivity to moves in oil prices when it briefs analysts in London on Thursday night.

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BHP's US shale has edge over local rivals

John Kehoe
841 words
4 Dec 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Washington | BHP Billiton's shale ­business in the United States is better placed than local high-cost competitors to withstand the dive in the oil price, though analysts say persistent low prices will slash energy company cash flows and slow new drilling.

At $US70 a barrel of West Texas Intermediate (WTI) crude oil, about half of all US shale oil reserves are unprofitable, Barclays Capital ­estimates. The price of oil has slumped almost 40 per cent since mid June and was trading around $US67.64 a barrel of WTI on Tuesday in the US.

The price collapse is due to a surge in US oil production enabled by ­revolutionary fracking and horizontal drilling, softening demand from China and Europe and a refusal last week by the Organisation of the Petroleum Exporting Countries to slow down pumping.

About three-quarters of BHP's onshore US shale drilling is occurring in the oil-rich Eagle Ford area in southern Texas where BHP bought into in 2011 as part of a $US20 billion ($24 billion) bet on the US oil and gas sector. The break-even point for oil ­producers in the Eagle Ford is ­estimated by analysts to be $US40 to $US60 a barrel, a lower hurdle than other oil fields.New well development curtailed

Across the US energy-rich states of Texas, North Dakota, Louisiana, ­Oklahoma and Arkansas, a prolonged slump in the oil price is likely to cause firms to curtail developing new wells.

But it will not kill the US shale boom, given some producers have low costs after already buying land and thanks to superior drilling techniques.

The price plunge will hurt BHP's cash flows and may force it to reconsider guidance that it expects its US shale business to be cash flow positive by the 2016 financial year. Deutsche Bank said the deadline could be delayed until 2018 if current low prices continue. Still, US analysts say Australia's biggest company is reasonably placed to weather the lower prices due to the bulk of its operations being in the low-cost Eagle Ford area.

"Given BHP's broader base of assets and sources of funding, BHP is not going to be nearly as hurt as those relying solely on the revenue base of the oil they're producing," Barclays oil analyst Michael Cohen said.

Smaller, highly leveraged energy companies such as EXCO Resources and Quicksilver Resources will be ­challenged to attract finance and maintain drilling at current low prices.

"Some of the larger players will start rethinking some of their capital investment in new wells and additional ­capital flowing into the shale ­industry will slow down," said Houston-based ADI Analytics chief ­executive Uday Turaga.

Major producers including ­ConocoPhillips, Pioneer Natural Resources and Continental Resources are already curtailing plans to add ­drilling rigs next year.Deutsche downbeat

Deutsche Bank was more downbeat about the impact on BHP, saying that the oil price plunge was pressuring BHP's liquids-focused strategy.

BHP has diverted most of its drilling activity away from gas to oil over the past year or so, due to an earlier sharp fall in the gas price. Deutsche analyst Paul Young said at these low oil prices BHP may be better shifting from the ­oil-rich Permian, back to its Fayettville gas acreage.

BHP announced in October it would sell the Fayettville acreage in Arkansas, after earlier writing off $US2.84 billion on the asset.

At the current oil price, Deutsche estimates the Permian is not clearing BHP's cost of capital and the Black Hawk internal rate of return at Eagle Ford is about 20 per cent, down from 65 per cent BHP recently outlined.

Across the industry, the Permian region in west Texas has a break-even price of about $US70 to $US80 a barrel.

The Bakken formation in North Dakota is economic at about $US55 to $US85, Barclays estimates.Lower half of the cost curve

BHP's own analysis shows that its Black Hawk acreage in the Eagle Ford was drilling wells for an average price of about $US4.2 million as of June this year, down from more than $US6 million in early 2013.

The average drilling cost for the US shale industry is between ­$US6 million and $US8 million, ADI Analytics ­estimates.

Industry observers in Texas believe BHP is in the lower half of the cost curve compared to large and small ­competitors. "They're below the ­average because they have such a heavy position in the best areas," Mr Cohen said.

BHP petroleum president Tim Cutt told investors on October 27 in London that BHP had tested its shale business at lower prices and it was "very robust". At the time, the oil price was around $US85 a barrel.

"We would have to see a substantial drop before we change any activities," Mr Cutt said.

BHP is a relatively newcomer to onshore shale drilling and until three years ago was focused on deep water operations.


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BHP Billiton urged to drop South32 spin-off
THE AUSTRALIAN DECEMBER 16, 2014 12:00AM

Matt Chambers

Resources Reporter
Melbourne

BHP Billiton is facing calls to drop its $US12 billion ($14.5bn) South32 spin-off of non-core assets because of the effect slumping oil and iron ore prices are having on the rest of the business.

But the feeling is far from widespread, with analysts and ­investors still keen to hear details of the demerger through which chief executive Andrew Mackenzie plans to slim down the company into four “pillar” units.

In a report to clients yesterday, RBC Capital analyst Chris Drew called for a shelving or rejigging of South32.

The report also downgraded the big miner to “underperform”, despite sharp recent share price falls and in contrast to its “outperform” rating on Rio Tinto.

“We question the timing of the South32 spin-off amid potential structural change in oil and iron ore,” Mr Drew said.

Mr Drew said BHP was facing less diversification through its “four pillars” strategy, with two pillars coming under pressure from slumping iron ore and oil prices that are pummelling BHP’s financial strength and share price.

“We think this could be a case of ‘good idea, bad timing’ and question BHP’s financial flexibility in the coming two years,” he said. “We like South32, so much so, that we think BHP should hold those assets, or at least consider other options such as letting South32 shoulder the debt burden, instead of letting South32 go debt-light.”

Others were not as downbeat on BHP or its plans. Citi analyst Clarke Wilkins said he still thought BHP was a better buy than Rio because of its wider range of commodities.

“We expect BHP’s spin-off of South32 to be a positive catalyst,” Mr Wilkins said.

Anthem Investment Management fund manager Neil Boyd-Clark said recent plunges in oil and iron ore prices did not reduce the appeal of a spin-off of South32 and its coal, aluminium, manganese and silver assets.

“Given it’s BHP shareholders that will be getting shares of the new company, I don’t see any disadvantage in it going ahead,” Mr Boyd-Clark

“If the logic for the separation existed previously then that logic should still apply.”

Another fund manager at a top-10 Australian holder of BHP said it was too early to work out whether South32 was a good thing because BHP had not released detailed projections.

“If it doesn’t make sense in a cashflow or investment return sense then shareholders presumably wouldn’t support it,” he said.

BHP plans a board decision on the demerger early next year, after regulatory approvals are received, with details of the company to be released in March and a shareholder vote in May. RBC’s downgrade, and a drop in target price from $37 to $30, was not based on commodity price reductions but a review of the portfolio.

“As we go through all the numbers on the different divisions for BHP, as well as the profit and loss, cashflow and balance sheet dynamics on both our forecasts and spot metrics, we regularly find that BHP comes up last or at the back of the pack on most metrics outside gearing and return on capital employed,” Mr Drew said.

“The main reasons for this are the big dividend commitment as well as the lack of flexibility on capital expenditure for 2015-16.”

BHP’s shares, which are off 27 per cent since in the past four months, ended 13c lower at a fresh five-year closing low of $28.33.