5 years after BHP Billiton plunged $20bn into the US shale revolution, the wait goes on for shareholders.
Even when oil costs rally by one-third the fields won’t generate vital free money circulate till the flip of the last decade, the mining firm cum oil producer revealed at investor briefings final week.
But the top of BHP’s petroleum enterprise says the corporate stays dedicated to its shale belongings, which he believes can outstrip its typical oilfields and plug a provide hole that it sees rising from the business-extensive funding drought caused by the collapse in crude costs since mid-2014.
“We admit right away that we didn’t get the timing proper [of the shale deals],” says Steve Pastor in an interview in London. “However what we did decide up have been implausible belongings.”
BHP’s acquisition of two US shale producers in 2011 was adopted by $17bn of funding, beefing up an oil enterprise that has lengthy set the world’s most useful mining firm aside from its friends. About one-third of BHP’s group earnings earlier than curiosity, tax, depreciation and amortisation have come from petroleum over the previous 5 years.
The timing of its shale guess proved unwell-judged. Following a savage market downturn that has seen oil costs greater than halve, BHP has racked up $12bn of impairments and the US shale enterprise is now valued at simply $12.6bn. Output is predicted to fall by 1 / 4 this yr, the consequence of a a lot decreased drilling programme.
BHP’s oil publicity has been a cause for the corporate’s underperformance towards friends over the previous yr and a half. However as China’s financial progress slows and the business expects sluggish lengthy-time period demand for commodities corresponding to coal and iron ore, BHP’s petroleum enterprise is arguably extra necessary than ever.
Eventually week’s investor briefings BHP tried to reset expectations for its oil enterprise, stressing a dedication to the corporate’s US onshore place and a perception that the crude market will come again into stability earlier than its different commodities.
“When you consider what we have now right now … [oil] is among the most engaging progress levers and choices throughout the group portfolio,” says Mr Pastor.
Even earlier than its enterprise into US shale, BHP was uncommon amongst miners in having a big oil enterprise, based mostly largely on deepwater fields round Australia and the Gulf of Mexico.
At this time BHP says it’s a prime 10 producer of each US shale fuel and oil and ranks fourth by output within the Gulf of Mexico. When it comes to manufacturing — some 660,000 barrels of oil equal per day — BHP’s oil enterprise bears comparability with that of Chesapeake Power and Apache, in accordance with Wooden Mackenzie knowledge.
Mr Pastor addressed buyers after a well timed carry from Opec, the oil producers’ cartel, which final month agreed to chop output for the primary time because the monetary disaster — a shock that helped to propel BHP’s share worth to a 12-month excessive.
However considered one of analysts’ most important conclusions from a welter of data on BHP’s oil enterprise this month is that its US onshore belongings — in nicely-recognized shale formations such because the Permian basin and Eagle Ford in Texas — will not be sufficiently money-generative for some time longer.
“The problem for the portfolio stays the shortage of free money move,” say analysts at Deutsche Financial institution.
BHP’s projections suggest that the US onshore enterprise is unlikely to contribute constructive free money move till 2020 if immediately’s oil and fuel costs persist, say analysts at JPMorgan. The US oil benchmark West Texas Intermediate — in the present day at about $50 per barrel — must rise to $70 “to generate sustainable, constructive pre-tax free money circulate”, add the analysts.
BHP says the US onshore enterprise ought to at worst be broadly money stream impartial, including that earnings from different commodities imply the corporate might be affected person with shale, the place it’s chopping the price of constructing wells.
Notably within the Permian basin, BHP thinks it might raise manufacturing from 30,000 boe/d to one hundred fifty,000 boe/d in 5 years, making it the most important a part of its petroleum portfolio.
Certainly, BHP is counting on its US onshore enterprise to plug the manufacturing hole anticipated from declining typical fields.
One meant new typical challenge — Mad Canine 2 within the Gulf of Mexico, the place BHP has a 24 per cent share alongside operator BP — will attain a remaining funding determination inside six months.
Analysts at Credit score Suisse spotlight how Mad Canine 2 will solely produce from 2022 or later. “What we expect is lacking is a standard oil asset that would fill the hole earlier than Mad Canine 2 … a publish-discovery, pre-manufacturing acquisition in deep water oil can be superb to fill the asset hole however in all probability unlikely,” they are saying.
Mr Pastor doesn’t rule out offers. “It needs to be on the proper worth but in addition contemplate fiscal phrases and political danger,” he says. “And it has to compete with some other alternative for capital in BHP.”