BHP takes $7bn hit on US shale operation

Mining firm BHP Billiton has disclosed that it would take $7 billion in impairment charges on its U.S shale operations.

The asset impairment, which equates to $4.9bn after tax, is the largest announced by the Anglo-Australian group during a wrenching commodities downturn that is devastating the mining and energy sectors.

Following the news, BHP’s London-traded shares dropped almost 6 per cent to 618p.

BHP, the most valuable miner by market capitalisation, has always been unusual in the sector by virtue of its significant oil business. It vastly expanded its exposure to oil in 2012 when it spent more than $20bn on US shale acquisitions.

The impairments announced on Friday mean BHP has now written off almost $13bn on the deals in which, in addition to the purchase costs, it has committed more than $15bn of capital investment.

The group said the value of its onshore US assets now stood at $16bn, after depreciation and amortisation and including $4bn of deferred tax liabilities.

Andrew Mackenzie, chief executive, said oil and gas markets had been significantly weaker than expected. “We responded quickly by dramatically cutting our operating and capital costs . . . while we have made significant progress, the dramatic fall in prices has led to the disappointing write-down,” he said.

“However, we remain confident in the long term outlook and the quality of our acreage. We are well positioned to respond to a recovery.”

HP said it would significantly reduce output from its US fields, cutting the number of rigs to five from 26 a year ago.

The change highlights how the environment in the US shale sector has soured for BHP, which had previously emphasised its sharply reduced operating costs and the flexibility of its US business compared with its longer-term mining operations.

The sharp downturn in the oil sector increases the likelihood that BHP will make an unprecedented dividend cut, perhaps as soon as next month when the group is due to announce its results for the first half of its financial year.

BHP has not cut its progressive dividend since its merger with Billiton in 2001. But payouts have been slashed across the mining sector as the commodities slump has wreaked havoc with miners’ ability to reward shareholders.

 

The group had already been hit by the falling price of iron ore — down more than 75 per cent from peaks in 2011 — and copper, which is down more than half from its peak.

BHP’s investments in shale increased significantly under Marius Kloppers, Mackenzie’s predecessor. He left BHP almost three years ago as the incipient commodities downturn forced the mining sector to curb its expansionary plans and slash spending.

BHP said it was cutting its medium and long-term gas price assumptions as well as its short and medium-term oil price assumptions. “Our long-term [oil] price assumptions continue to reflect the market’s attractive supply and demand fundamentals,” it said.