Anglo-Australian mining giant BHP Billiton has announced that it will cut its US shale oil operation by 40 per cent in a bid to avoid cutting dividends to shareholders despite dramatic price falls in all its main commodities – iron ore, copper and oil.
The company was hit with near across-the-board price declines for its commodities in the December half from the previous six months. The biggest fall was in its top earner iron ore, whose selling price slumped 27 percent over the period to an average $70 a tonne.
BHP said it would reduce the number of its drilling rigs from 26 to 16 by June and revise its shale drilling budget, originally set at $4 billion for this financial year, in February. Instead, it plans to focus on drilling in the liquids-rich Black Hawk basin, while cutting back in the Permian and Hawkville acreage.
“We will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production,” Chief Executive Andrew Mackenzie said in a statement.
Shale drilling is relatively easier to cut down than conventional operations as shale wells are smaller an can be turned off and – potentially – turned on again once the prices rebound. The company is not expected to cut spending on its conventional wells in the Gulf of Mexico.
The world’s largest miner, which differentiates itself from its mining rivals by owning oil and gas assets, spent $20bn in 2011 breaking into the shale oil and gas market buying Petrohawk Energy and Chesapeake Energy in Louisiana and Texas. Only this year, it has spent $1.9 billion on onshore drilling.
BHP also flagged it would book writedowns of up to $600 million after tax following the sale of some of its onshore petroleum assets and the failed sale of its Nickel West business.
It will also book a tax charge of $809 million tied to Australia’s now-repealed mining profits tax.
According to Reuters, other candidates for cuts in BHP’s $14.2 billion capital and exploration spending plan could be its longer-dated projects like BHP’s Canadian Jansen potash project and Australian Olympic Dam copper expansion study.
Given the extent of the price declines, some analysts question Mackenzie’s commitment to the proposed spin-off of its aluminium, manganese, some nickel and coal assets into a new company, South32, as it will limit his ability to return capital to shareholders in the near term. By contrast, BHP’s arch rival Rio Tinto has repeatedly said it is on track to “materially increase” returns to shareholders starting in February, despite a 50pc plunge in prices of iron ore, its main earner, over the past year.
However, Mackenzie remains committed to the demerger, quoting BHP’s strong operational performance over the past six months, cost reduction and faster-than-expected improvement in capital productivity. BHP believes spinning out those non-core assets will simplify the parent company, reduce overheads and produce a greater focus on its best assets.
The demerger is on track to be completed this financial year, Mackenzie said, with the transaction likely to be put to shareholders in May.
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