It was always going to be interesting to see whether and how BHP Billiton responded to the pressure on its chief executive, Marius Kloppers, which has been building within its shareholder base as the discontent over the group’s aggressive investment program grew. On Friday we saw a clear statement of support from his chairman.
Some of the background issues that have generated that shareholder unhappiness, which has emerged despite the fact that BHP’s shares have out-performed most of its peers and that Kloppers has safely navigated his group through five years of unprecedented volatility and challenges, are articulated in James Kirby’s commentary on this site (The seven sins of BHP's Marius Kloppers, August 3).
The latest and sharpest focus for that agitation – which relates largely to the view of some big shareholders that they should have gained greater access to the torrents of cash that poured through the group during the peak of the super-cycle in commodity prices last year rather than see it poured into expansion – was the unfortunately-timed plunge into the US shale gas sector last year.
Now BHP has owned up to the consequences of buying into that sector just before shale gas prices plunged by announcing a $US2.84 billion pre-tax writedown. It also announced a $US450 million pre-tax charge against the carrying value of its nickel assets, but it is the shale gas acquisitions and the $US20 billion or so it spent on entering the sector that has been the focus of most of the angst. That’s $US20 billion that some large shareholders believe would have been better directed to their bank accounts.
In February last year BHP acquired a portfolio of shale gas interests around Fayetteville in Arkansas from Chesapeake for $US4.75 billion and subsequently acquired Petrohawk Energy for an enterprise value of $US15.1 billion. The Chesapeake assets are dry gas fields, while Petrohawk’s resources are liquids-rich.
The writedown relates only to the Chesapeake fields and is significantly less than some analysts had anticipated – there had been speculation of writedowns ranging up to $US5 billion. BHP was a little unfortunate with its timing as it assessed the value of the assets at June 30, when the gas price was around $US2.70 per MBTU. Today it is around $US3.20 per MBTU.
Nevertheless, despite the fact that a 'Who’s Who' of the oil and gas industry has made similar misjudgements and, depending on their accounting regimes, will have similar writedowns to make, it is an embarrassment for BHP to have to write about 60 per cent off the value of assets it acquired only 18 months ago. Kloppers himself described the impairments as "clearly disappointing".
Interestingly, there were no charges against the value of the Petrohawk assets, which, because of their liquids, are proving to be more attractive than BHP thought when it acquired the group. BHP has shifted the focus of its drilling from Fayetteville to Petrohawk’s Eagle Ford and Permian fields.
Those fields have extremely attractive returns, amongst the highest in BHP’s vast portfolio, and had the accounting rules been different (had BHP acquired Petrohawk ahead of the Chesapeake assets) could probably have been revalued upwards after a massive increase in the estimated size of the recoverable resources.
Kloppers remains confident that the decision to enter the shale gas sector was the right one and that the acquisition of the dry gas assets, at the lower end of the industry gas curve, will ultimately be vindicated.
In the context of BHP and its $US125 billion balance sheet, the size of the writedown on the Fayetteville assets is in any case immaterial – it is the perception of misjudgement that it has created that is of greater consequence.
In a show of support for Kloppers, and perhaps to try to dampen some of the speculation in the market about his future, BHP’s chairman, Jac Nasser said the board, too, remained of the view that the investment in shale gas was the right one for shareholders and that the assets acquired were of high quality and would generate good returns.
Nevertheless, he said, it was "disappointing" that low US gas prices had impacted the carrying value of the Fayetteville assets.
Kloppers, and Petroleum chief executive Mike Yeager, have responded to the writedowns – and have perhaps attempted to defuse some of the tensions between the company and its shareholders – by foregoing any bonuses they might otherwise have been entitled to for the 2012 financial year, a decision Nasser said the board respected and agreed with.
Within the space of a year, the environment BHP operates within has changed dramatically, with China and indeed most of the Asian economies now slowing as the eurozone’s problems and the anaemic state of the US economy drag on global growth.
The nickel writedown was against the backdrop of reduced demand and increased supply and therefore significantly lower prices. Iron ore and coal prices are down around 30 per cent this year. The Australian dollar hasn’t tracked commodity prices down. Costs in the resources sector continue to rise.
Nasser referred to those difficulties but said, pointedly, that BHP was "fortunate to have Marius’ leadership, together with a strong management team supporting him in these challenging times".
That should probably be interpreted as a statement of continuing support for Kloppers. Whether it will be sufficient to end the speculation about his CEO’s future, however, is yet to be seen.
Kloppers cops a shale gas eruption
Perception, more than reality, is driving the discontent with BHP Billiton chief executive Marius Kloppers. In the context of the overall balance sheet, the size of the shale gas writedown is immaterial.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free