SYDNEY-- BHP Billiton Ltd. flagged up to $250 million in
write-downs on its petroleum business and a sharp reduction in U.S.
drilling activity, in the latest example of falling oil prices
roiling a major energy producer.
The world's No. 1 miner has pivoted more toward the energy
industry in recent years, gambling on the prospect of growing
demand, particularly from rapidly expanding economies including
China. It has spent billions building out its business to become
one of the biggest petroleum producers outside of the major
integrated oil companies in places such as the U.S. and
Australia.
However, it now joins those global energy companies writing down
assets and cutting back spending on energy projects to protect
profits after a shock oil-price collapse. Suncor Energy Inc. said
this month it would cut its 2015 capital spending by 1 billion
Canadian dollars (US$826 million) in response to the drop in
prices. Houston-based ConocoPhillips last month said it planned to
lower its spending by 20% in 2015. Last week, U.K.-listed Premier
Oil PLC said it expected to take a write-down of $300 million
against its assets.
Oil prices plunged from more than $100 a barrel in June to less
than half that level now, the casualty of a surplus brought on by
booming U.S. production and weaker-than-expected demand.
"In petroleum, we have moved quickly in response to lower prices
and will reduce the number of rigs we operate in our onshore U.S.
business by approximately 40% by the end of this financial year,"
said BHP Chief Executive Andrew Mackenzie.
The asset write-downs in the petroleum division relate to the
sale of oil assets in North Louisiana and gas assets in the Permian
Basin in Texas.
BHP has also faced recent trouble in the iron ore and coal
sectors--two of the four so-called pillars of its business--in
which it has curbed spending due to a market glut and sharp fall in
prices.
Investors and analysts say it could just be a taste of what's to
come.
"It is certainly going to be an ongoing theme," said Ben Lyons,
a Sydney-based portfolio manager at ATI Asset Management, which has
a small holding in BHP. "In our opinion, they will only continue
and they will increase in size as the company is forced to
recognize the very poor investment that was made under previous
management."
Former BHP chief Marius Kloppers plowed about $20 billion into
U.S. shale-gas businesses in 2011 and BHP has since spent billions
of dollar a year exploring and developing its assets. In October,
the company decided to cut its losses on the poorly timed
Chesapeake Energy investment that year by putting its fields in
Fayetteville, Ark., up for sale. It is continuing to look for a
buyer.
On Wednesday, BHP, which also has oil-and-gas interests in
Australia, the Gulf of Mexico and Trinidad and Tobago, also cut its
projection for full-year petroleum exploration expenditure by 20%
to $600 million. It said it would update its separate U.S. onshore
drilling and development budget for the full fiscal year next
month.
The moves came as BHP reported higher production of key
commodities in the six months through December, including a 15%
increase in Australian iron-ore output and a 21% rise in
metallurgical coal production. However, the company, which is based
in Melbourne, Australia, also said it was likely to take an
impairment charge of up to $350 million after failing to find a
buyer for its Australian nickel assets.
Until recently, its energy division provided a hedge against
falling prices of other commodities, such as iron ore and base
metals.
"Now that has turned against them and is benefiting companies
like Rio Tinto, for whom a falling oil price is a significant
positive," said ATI's Mr. Lyons.
For investors, the oil rout also pushes out the prospect of
materially higher capital returns. Fund managers said they see no
scope for additional capital management initiatives, such as
special dividends or share buybacks, at current commodity
prices.
BHP disappointed investors last August when it failed to outline
any plans to buy back stock, with analysts having earlier forecast
a capital-management program worth as much as $5 billion. Its
Australian stock is down 26% on a year ago.
"Capital management is well off the table at the moment--the
question now is how BHP will even continue the ratcheting-up of its
dividend," said Robert Hook, a Melbourne-based fund manager at SG
Hiscock & Co., who has sold down his interest in BHP.
The oil rout has prompted some fund managers to question whether
BHP may be losing some of its most prospective assets as it
prepares to spin out facilities including aluminum smelters to
focus on oil, iron ore, coal and copper--all of which investors
have soured on in recent months. Mr. Mackenzie on Wednesday
defended the spinoff, though, saying it would result in a better
performance from both BHP and the proposed new company, South32, by
simplifying the businesses.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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