BHP Billiton has once again dramatically reduced the book value of its controversial United States shale division, with the company announcing a $US4.9 billion ($7 billion) after-tax write-down on Friday.
The impairment charge amounts to $US7.2 billion before tax, and takes the total impairments against the division past $US12 billion (on a before-tax basis) over the past three years.
A bad year for commodities
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A bad year for commodities
BHP Billiton are hit hard by plunging commodity prices and a burst dam in Brazil.
The division was put together for $US20 billion in 2011, but that acquisition now appears to have failed.
The new impairment is a response to the dramatic fall in oil and gas prices over the past 18 months.
Benchmark oils like Brent and West Texas Crude have lost more than 70 per cent of their value over the past 18 months, while US gas prices touched their lowest ever price last month.
BHP noted that oil prices had continued falling over the past three months, and said it had lowered its near-term expectations for oil prices.
"Although we expect prices to improve from their current lows, we have reduced our oil price assumptions for the short to medium term. Our long-term price assumptions continue to reflect the market's attractive supply and demand fundamentals," the company said in a statement.
Friday's announcement comes just six months after the company announced a $US2.8 billion after-tax impairment against the same division.
BHP believes the shale division has a book value of $US12 billion, but Macquarie analyst Hayden Bairstow speculated today the net present value of the division was closer to $US2.5 billion.
Further impairments possible
Mr Bairstow said BHP's petroleum division may suffer further impairments if oil markets don't improve over the next six months.
"If spot oil prices don't recover, further reductions in drilling rates, capex and implied book value could occur with the full-year result in August," he said in a note to clients.
BHP had 26 rigs working its US shale acreage this time last year, but the company has reacted vigorously to sliding commodity prices and continually cut rig numbers since then.
Rig numbers will fall from seven to five by March.
Reduced rig numbers means reduced capital spending on the division, and BHP indicated lower capex numbers would be announced soon.
"Investment and development plans for the remainder of the 2016 financial year are under review, with a focus on preserving cash flow," said BHP in a statement.
Shaw and Partners analyst Peter O'Connor estimated the revised rig numbers would save $US300 million to $US500 million in spending.
The spending cuts are unlikely to be the last, with BHP desperately trying to reduce capital spending in a bid to protect its dividend ahead of its half-year results on February 23.
BHP chief executive Andrew Mackenzie said the impairment was "disappointing" but said he still had faith in the shale division's future and hinted that the quality of the company's acreage was not the problem.
"We remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery," he said.
While it has downgraded its near-term oil price forecasts, BHP said it had not changed its long term view of the commodity.
RBC expects West Texas Intermediate Crude to average $US40 per barrel in 2016 and improve to average $US57 per barrel in 2017.
Citi analyst Clarke Wilkins said the impairment was "no surprise" and he forecast the shale division to lose $US200 million in the 2016 financial year.
Despite the tough times in oil and gas, BHP shares closed 19¢ higher at $15.07 after metal prices rose and mining stocks rallied in London on Thursday night.