Australian miner BHP Billiton parachuted into the American shale gas sector with two back-to-back deals worth a combined $17 billion last year. Little did it know it was landing in the centre of a record-setting gas price slump.
“Not thrilled, but not worried either,” is how Mark Taylor, senior resources analyst at Morningstar in Sydney, reacted to the acquisitions. Taylor had expected BHP to buy a conventional oil and gas developer such as Woodside Petroleum, BHP’s partner in two Australian LNG projects.
However, soon after BHP finalised the two deals, United States gas prices tumbled to below $2 per million Btu (MMBtu). They now hover around $3/MMBtu – still half the necessary level to justify shale gas development, Taylor said.
In response, BHP said last week it would take a write-down of $2.48 billion on the dry gas-rich Fayetteville assets, which it had just bought for $4.75 billion. While the company remained upbeat about Fayetteville’s long-term value, Chief Executive Marius Kloppers called the impairment “clearly disappointing”.
The Permian Basin and Eagle Ford shale assets BHP also bought last year, through the $12.1 billion takeover of Petrohawk Energy, avoided the same fate thanks to their strong liquids content.
Still, Kloppers and BHP Petroleum Chief Executive Mike Yeager were forced to forego their bonuses this year – a move that will reportedly cost Kloppers almost $5 million. Combined with the massive cost crunch BHP is seeing in the Australian resource sector, the impairment has led to serious investor worries, according to Australian newspapers.
The change in fortune could not have been predicted last year, analysts agreed. However, US gas prices on 22 February 2011, the day the Fayetteville deal was announced, already stood at the relatively low level of $4.23/MMBtu.
IHS Herold assigned the deal an implied proven reserve value of $1.66 per thousand cubic feet. “So you could see where the value would go if gas prices went down further,” said Cindy Giglio, a principle analyst at IHS Herold.
Either way, BHP has taken such a deep dive into the US shale sector that it will have to sit tight until long-term upside emerges. Meanwhile, it will focus 86% of its drilling on liquids in the Petrohawk assets.
“BHP just needs to stick to its knitting and ride out what is an unsustainable low patch,” said Taylor. “It’s quite likely BHP will be writing back value in a year or two. That’s the nonsense that is mark-to-market accounting.”