BHP write-down reveals fragile state of shale

After the latest charge, Melbourne-based BHP values its United States onshore business at $24-billion. That’s more than 40% higher than what analysts at JPMorgan Chase & Co think it’s worth and more than twice Citigroup Inc’s estimate.

The producer said its US onshore assets would generate positive cash flow in the year to June 2016 with oil at $60 a barrel, above current prices.

“Given the deteriorating conditions of the US oil and gas market, we thought an impending impairment could have been larger,” analysts at JPMorgan said this week.

After four years of record supply, the US’s natural gas output is shrinking as producers retreat from shale amid tumbling oil prices.

That’s hurting investments made by explorers including Royal Dutch Shell Plc, Statoil ASA and Total SA, which have impaired more than $15-billion in assets over the past three years.

Market capitalisation
The market capitalisation of the 62 oil and gas companies in the Bloomberg Intelligence North America Exploration and Production Index has shrunk by almost half this year.

BHP, the biggest overseas investor in US shale, rose 0.7% to A$27.08 in Sydney trading after a 0.7% decline on Wednesday. The shares have lost almost a quarter of their value in the past 12 months.

Gabrielle Notley, a spokesperson for BHP in Melbourne, declined to comment beyond Wednesday’s announcement.

The latest charge brings the total impairments on the company’s US shale ventures to $5.9-billion.

Although new write-downs were anticipated, investors may be concerned that BHP’s US onshore unit requires prices higher than current levels for the division to generate free cash in the current fiscal year, according to Ric Spooner, a chief analyst at CMC Markets in Sydney.

“It’s an interesting insight into where things currently stand for them,” Spooner said.

“It’s also a window into the overall US shale market and the pressures that may be faced by the shale industry if prices do stay below $60 a barrel.”

Natural gas futures
Natural gas futures have fallen by 28% in the past 12 months and dropped to the weakest in almost three years in April. West Texas Intermediate lost almost 50% over that period, tumbling to a six-year low in March.

BHP spent $20-billion in 2011 on shale assets in the US, getting its foothold in US plays in Arkansas, Louisiana and Texas.

It booked a charge of $2.8-billion against the Fayetteville shale gas operation in the 2012 fiscal year and a $266-million write-down on its Permian Basin assets the following year. Most of the latest charge is related to the Hawkville field in Texas, the company said.

BHP said it will cut spending on its US onshore unit to $1.5-billion in the year to June 2016, supporting a development programme of 10 operated rigs.

The producer spent $3.4-billion on drilling and development the previous year.

Gas production from the seven largest American shale basins in August will fall 0.6% from a month earlier to 45.1-billion cubic feet a day, the biggest drop since March 2014, the US Energy Information Administration said this week in its monthly drilling productivity report.

Estimates by the Energy Information Administration have shown supply declines since June. – © Bloomberg

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