BHP's slashed US drilling won't touch shale growth

BHP Billiton does not expect cutting its US oil drilling by 15% and nearly halving its online oil rigs to force oil production to decline, saying the move will do little to change the market dynamics that led to the oil price crash.
BHP's slashed US drilling won't touch shale growth BHP's slashed US drilling won't touch shale growth BHP's slashed US drilling won't touch shale growth BHP's slashed US drilling won't touch shale growth BHP's slashed US drilling won't touch shale growth

Andrew Mackenzie, CEO da BHP Billiton.

Anthony Barich

In an ominous note in its half-year earnings release, however, BHP said: “We may not recover our investments in mining, oil and gas assets, which may require financial write-downs.”

CEO Andrew Mackenzie said BHP was planning to cut a further $US5.4 billion ($A6.9 billion) in capex across the business over the next two financial years, including a $2 billion reduction in developing North American shale oil and gas – cost cutting he said had increased the company’s free cash flow and allowed it to raise dividend payments now and into the future.

"We remain committed to steadily increasing, or at least maintaining, this dividend per share," he said.

BHP said it would reduce its onshore US-operated rig count from 26 at period end to 16 by the end of the 2015 financial year.

In addition, the company expects to cut its capital expenses in its US oil drilling program by 15% to $3.4 billion this year – expenses which are expected to drop further to $2.2 billion next year.

“The majority of the revised drilling program will be focused on our liquids rich Black Hawk acreage with activity in the Permian and Hawkville limited to the retention of core acreage,” BHP said.

“[BHP’s] dry gas development program will be reduced to one operated rig in the Haynesville, with a focus on continued drilling and completions optimisation ahead of full field development.

“The reduction in drilling activity will not impact 2015 financial year production guidance and we remain confident that shale liquids volumes will rise by approximately 50% in the period.”

The major said last month it would shut down 40% of its US shale oil rigs by the end of the fiscal year, leading analysts to forecast capital expenditure costs.

“Crude oil prices fell in the first half of the 2015 financial year as a result of growing supply, a lower demand outlook and OPEC’s decision to maintain production levels,” BHP said.

“With prices at approximately half the average of the previous three years, the supply response required for a cyclical rebalancing of the market is under way.

“While a near-term recovery in price depends on the rate that production growth slows, the medium-term outlook appears positive as higher prices will be required to induce the new supply needed to offset natural field decline.”

The major announced last year it would put its Fayetteville dry gas shale assets on the market, but this morning it said it would retain the asset "to maximise value".

"The longer-term development of the Fayetteville remains an attractive option and with the majority of our acreage held by production, we will continue to defer investment for value, consistent with our long-term outlook for gas prices," BHP said.

The company also confirmed it had signed an agreement to sell its gas business in Pakistan to Tri-Resources, a subsidiary of Hashoo Group.

Over in the US, BHP noted that domestic gas prices came under pressure as continued supply growth allowed storage inventories to rebuild despite relatively normal seasonal demand.

In the longer term however, industrial demand growth, rising gas-fired power generation and LNG exports were expected to support prices, the major said.

“In the LNG market, mild winter temperatures across North Asia and high storage levels have limited spot demand while the ramp-up of new export projects and lower crude oil prices are expected to temper the market in the second half of the financial year,” BHP said.

A 17% reduction in average realised oil prices reduced BHP’s underlying EBIT by $802 million, while weaker coal prices, both thermal and coking, reduced underling EBIT by a further $775 million.

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