Cold brings comfort for BHP shale strategy
Cold weather has helped lift US gas prices by 20 per cent in the past month, and the benchmark price reached $US3.88 ($A3.73) per million units on Monday.
Mr Kloppers and his petroleum chief, Mike Yeager, will remember these prices well: the price was $US3.89 on the day in 2011 when BHP paid $US4.75 billion to Chesapeake Energy for the Fayetteville shale.
That punt on shale was quadrupled soon after, when BHP paid $US15.1 billion for Petrohawk Energy.
Those acquisitions have since been the source of much criticism, after a slump in gas prices forced BHP to write down the Fayetteville asset by $US2.84 billion last year.
While it's too early to suggest a vindication of the controversial investments, the price rebound is making BHP's shale strategy look better today than at any stage in the past 17 months.
Pundits are predicting the gas price surge will continue in the US with contracts for April gas delivery fetching $US3.94.
Deutsche Bank predicts a long-term US gas price of $US4.75, while JPMorgan's models assume a rise to about $US5 by 2016.
A crucial milestone in the recovery of BHP's shale division will come when rigs start returning to the gas-dominated Fayetteville shale.
Just six of BHP's 45 onshore rigs are working the Fayetteville, with the remaining 39 pursuing more lucrative shale liquids in the shales bought from Petrohawk.
Mr Yeager has previously said a gas price of $US3.50 would be sufficient to return rigs to the Fayetteville shale.
That has not yet happened, but a BHP spokeswoman stressed on Monday that the company's development plans would "remain flexible and aligned with the external environment".
Some of the value lost in impairments appears to have been offset by unexpected value gains in the liquids-rich Permian Basin, where BHP has been actively working in recent months.
Deutsche analyst Paul Young said he now valued BHP's entire US onshore petroleum business at more than BHP paid in 2011.
"We value the onshore business at $US25 billion and they purchased the four fields for about $US20 billion, so based on our price assumptions it is a value-accretive acquisition," he said.
"It's going to take them six to seven years to ramp up to full capacity so I don't think you can judge the acquisition after just the first year or two," Mr Young said.
Frequently Asked Questions about this Article…
A cold snap across North America pushed US gas prices up about 20% in the past month, lifting the benchmark price to roughly US$3.88 per million units. The short-term price rebound was driven by higher winter demand.
Higher gas prices improve the economics of BHP’s US shale assets. The price rebound makes the company’s shale purchases look relatively better than over the past 17 months, and analyst forecasts from Deutsche Bank and JPMorgan point to further upside, which could help offset earlier impairments.
In 2011 BHP paid about US$4.75 billion to Chesapeake Energy for the Fayetteville shale and later spent about US$15.1 billion to buy Petrohawk Energy’s assets. Deutsche Bank later noted the four onshore fields were purchased for roughly US$20 billion in total.
A slump in gas prices reduced the value of the gas-dominated Fayetteville asset, prompting BHP to take a US$2.84 billion write-down the previous year.
BHP’s petroleum chief previously said a gas price of about US$3.50 would be sufficient to return rigs to the Fayetteville. As of the article, that level hadn't been met: only six of BHP’s 45 onshore rigs were working in the Fayetteville while the rest targeted more liquids-rich plays.
Yes. Unexpected value gains in the liquids‑rich Permian Basin have helped offset some of the value lost to impairments in gas-dominated assets like Fayetteville, and BHP has been actively working in the Permian in recent months.
Deutsche Bank analyst Paul Young valued BHP’s entire US onshore petroleum business at about US$25 billion, higher than the roughly US$20 billion BHP paid. He also noted it could take six to seven years to ramp up to full capacity, so short-term judgments can be misleading.
Investors should track US gas price trends and futures (including near-term contract prices), analyst price forecasts (Deutsche Bank and JPMorgan views cited), rig counts returning to Fayetteville, performance in liquids-rich basins like the Permian, and BHP’s public comments on development plans and potential further impairments.
Call 1300 880 160
Start a chat
Schedule a call
