COMMENT

BHP shale joins the blunder big league

Shareholders in BHP Billiton must have shuddered when Mike Yeager announced he had bought more US shale assets on Thursday.

More News Videos

A bad year for commodities

BHP Billiton are hit hard by plunging commodity prices and a burst dam in Brazil.

The acquisitive Yeager, now running microcap Maverick Drilling and Exploration, was the original architect of BHP's $US20 billion ($28.8 million) punt on US shale in 2011.

That punt was, by Friday, back in the news for all the wrong reasons.

Friday's $US7.2 billion impairment is easily the largest worn by the shale division so far, and takes the total impairments against the division to $US12.84 billion before tax.

The figure is even higher if small impairments on certain evaluation wells and under-utilised pipe capacity are taken into account.

Advertisement

While perhaps not in the league of Rio Tinto's $US38 billion Alcan disaster, BHP's shale punt is now unquestionably one of the biggest blunders made during the China resources boom.

Unlike the $US2.8 billion pre-tax impairment against the division in July, this latest impairment was driven by commodity prices rather than problems with geology.

BHP chief executive Andrew Mackenzie welcomed the deal.
BHP chief executive Andrew Mackenzie welcomed the deal. Photo: Stefan Postles

Some see that as less of an indictment against those who bought the assets, but it has long been clear that the original premise behind BHP's shale punt was wrong.

Despite the more recent focus on shale oils and liquids, BHP's move into shale was originally focused on gas.

Crude's drop to a 12-year low is sending shock waves around the world at the same time concern is mounting that China's ...
Crude's drop to a 12-year low is sending shock waves around the world at the same time concern is mounting that China's policy interventions will fall short of stoking growth in the world's second-largest economy. Photo: Daniel Acker

Unlike oil, gas markets tend to be local rather than global, and that can make product gluts (like the one seen in North America in recent years) all the more damaging to commodity prices.

In the 15 years that US gas prices have been reported by the "Henry Hub Index", prices have never been lower than they were in mid December.

BHP Billiton's former Petroleum chief, now running microcap Maverick Drilling and Exploration, Michael Yeager.
BHP Billiton's former Petroleum chief, now running microcap Maverick Drilling and Exploration, Michael Yeager. 

They've recovered somewhat since then, but remain much lower than they have been in recent years.

It is also important to note that US gas markets appeared to be significantly over-supplied long before the Saudi Arabians decided to turn global oil markets on their head.

A review of disclosures by the largest 30 US shale firms showed 17 increased their hedge books in the first quarter.
A review of disclosures by the largest 30 US shale firms showed 17 increased their hedge books in the first quarter. Photo: Bloomberg

No surprise then that by March, zero rigs will work BHP's gas-dominated Fayetteville​ and Haynesville​ shales in Arkansas and Louisiana.

Despite BHP's efforts to run rigs only on the acreage that produces liquids, the company will still be beholden to weak US gas prices because the fields that produce liquids also produce gas.

While the proportion of liquids produced compared to gas has risen, BHP still produces more gas than oil in US shale.

US gas appears structurally challenged, but BHP chief Andrew Mackenzie was insisting on Friday that the long-term view for oil remained solid.

Even as oil prices have fallen more than 70 per cent over the past 18 months, the company revealed that it had not changed its long-term oil price expectations, and described the supply and demand fundamentals as "attractive".​

BHP's Black Hawk shale in Texas is among the best shale acreage available in the US, and while the entire division will be loss-making this year, the Black Hawk is believed to be viable at current commodity prices.

Shareholders may struggle to have faith in long-term oil prices when they watch a country like Saudi Arabia selling their product as fast as they can and new energy solutions for transport developing rapidly.

But they can take some consolation from the old Alcan assets which, despite all their failures, have recovered to be Rio Tinto's second biggest money-spinner.

12 comments