April 27, 2017
BHP Billiton announced its entry to the US shale industry in 2011 when it paid almost $5bn to secure a big position in one of the world’s largest gasfields.
Six years and billions of dollars of impairment charges later, Fayetteville Shale is back on the market.
It’s difficult not to see the move, revealed by BHP in a production report on Wednesday, as a response to Elliott Associates, the activist investor pushing the company to spin off its US oil and gas assets and simplify its corporate structure.
But it’s also part of an ongoing process that’s seen the Anglo-Australian miner buy, sell and swap plots to improve its position in the checkerboard that is US shale.
Through these deals, BHP’s expensively assembled shale footprint has shrunk from around 1.5m acres to around 850,000 acres today, according to people with knowledge of its petroleum business. (BHP followed up on the Fayetteville deal with the $15bn purchase also in 2011 of Petrohawk, a US shale producer).
Despite the near-halving of its acreage, BHP believes it now has a better portfolio with more adjacent plots that allow it to drill longer horizontal wells that produce more oil and gas.
Seen in that context, the decision to consider all options for Fayetteville including “divestment” is hardly surprising. Compared with its shale gas assets in the Haynesville, Louisiana, where BHP has been able to lock in returns of up to 25 per cent by selling forward production for up three years, it simply cannot compete.
That’s because it does not have the same production or cost profile as the Haynesville, which has the reserves to support two decades of production.
To underscore that point, BHP said on Wednesday it would put one more drill to work in the Haynesville in June, followed by two more later this year.
BHP feels it has got a pretty good formula in the Haynesville and reckons this is the right way to deploy shareholder capital, said one of the people with knowledge of its thinking.
But while the returns BHP has been able to achieve from its hedging model in the Haynesville and wider productivity gains in shale are impressive, this should not disguise some uncomfortable truths about its onshore business.
If current oil and gas prices persist, its shale assets are unlikely to contribute positive free cash flow until the end of the decade, say analysts. And then there is a broader strategic question of whether oil and mining mix.
Some large investors are sceptical of BHP’s claims that there are significant benefits from having mining and oil businesses under one roof and would like to see the whole petroleum business demerged.
Indeed, this could be the next line of attack from Elliott, which has promised a “more detailed response” to BHP’s withering assessment of its plans, which the miner slammed as little more than financial engineering.
For its part, BHP says its scale and financial strength are key competitive advantages for its petroleum business. Its chief executive, Andrew Mackenzie, may expand on that theme when he provides an update on strategy at a mining industry conference in Barcelona next month.
The Commodities Note is an online commentary on the industry from the Financial Times
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