BHP reducing Fayetteville Shale Play rig count to ‘zero’

BHP Billiton recently said it is still looking for a hasty exit from its unprofitable foray into Fayetteville Shale as declining natural gas prices continue to cast a dark cloud over the company’s U.S. drilling operations.

By rig count, BHP plans will cut the total number of operating drilling pads in the U.S. from 26 to 16. That also means the Australian conglomerate is essentially pulling up stakes in Arkansas’ maturing natural gas play with its current rig count at “zero” and its operational budget sliding to $100 million, BHP’s financial report shows.

In the company’s half-year review, CEO Andrew Mackenzie said the industrial mining giant is speeding up plans to reduce costs and invest in more profitable businesses by cuttings its previously announced U.S. shale capital budget by 50% from $4.2 billion to $2.1 billion.

“We are reducing costs and improving both operating and capital productivity across the (company) faster than originally planned,” Mackenzie said in the company’s 26-page financial and operational report. “These improvements will help mitigate some of the impact of lower commodity prices and we remain alert to opportunities to further increase free cash flow.”

The BHP chief executive also said that because of lower crude oil and natural gas prices, the Sydney-based conglomerate will reduce the number of onshore drilling pads it operates in the U.S. by 40%. The company will also shift the largest share of its ever declining U.S. onshore drilling budget to its oil-rich shale developments in West Texas.

“The revised drilling program will benefit from significant improvements in drilling and completions efficiency. Our ongoing shale investment program will remain focused on our liquids-rich Black Hawk (Texas) acreage.” Mackenzie said. “However, we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production.”

BHP HISTORY IN ARKANSAS
In late 2011, shortly after the Australia mining giant landed in Arkansas, BHP said it planned to quadruple production from its onshore U.S. shale operations, adding nearly 20 new rigs in the Fayetteville Shale region and increasing natural gas production fourfold by the end of the decade. At the time, BHP said its U.S. capital spending program would jump from $4.5 billion to $6.5 billion annually by 2020, with the lion’s share targeted toward its Arkansas development.

BHP’s leasehold position of 487,000 net acres makes it the second-largest Fayetteville Shale operator behind Southwestern Energy Corp. with an average operating stake of 58%. Those pricey assets were originally purchased from Chesapeake Energy Corp. in early 2011 with an average per well drilling and completion cost of $3.5 million.

As part of that deal, Chesapeake agreed to manage the properties for a fee until the inexperienced Australian mining giant was poised to take over the operations by itself. But none of those things ever happened.

By the end of 2012, BHP had already announced a $2.84 billion write-down of its Fayetteville Shale assets, saying a short-term over supply of natural gas resulted in a before-tax impairment charge against the carrying value of the Arkansas play.

Former BHP Billiton CEO Marius Kloppers, who resigned in October 2013, said the Fayetteville charge reflected the company’s decision to adjust its development plans by shifting most of its dry gas drilling operations in the Fayetteville Shale south to oil-rich Haynesville Shale in Louisiana and west to the Eagle Ford and Permian shale developments in Texas. 

“While we have responded appropriately to the changed market conditions, (the Fayetteville Shale) impairment is clearly disappointing,” he said. 

BHP’s current cost-cutting program does not bode well for the Arkansas play in the near-term, even though the Australian giant still owns more than 1,000 operating natural gas wells across central Arkansas.

MARKET PRESSURE
On Wall Street, the Australian conglomerate is under pressure to cut costs as international prices for copper, iron ore and other metals are depressed. As part of its current cost-cutting program, BHP has promised analysts and shareholders that the conglomerate will not reduce its dividend and will focus more on its core mining businesses.

In the near-term, BHP has said it will continue to cut losses and capital spending in Arkansas until a buyer is willing to take a $5 billion gamble and purchase the company’s nearly dormant assets, especially with current Henry Hub prices hovering around $3 per million British Thermal units (MMBtu).

"There's severe pressure for them to cut capex on the onshore business. Once they come clean with that, the market will be in a better position to assess its value," CIMB analyst Michael Evans said in a research note on Monday.

Mackenzie also re-emphasized that the company is not willing to part with its Arkansas assets, even if it means sitting on them until natural gas prices rebound.

“As announced in October 2014, we are actively marketing our Fayetteville acreage and will only pursue a divestment if full value can be realized, consistent with our long-term outlook for gas prices,” the BHP chief said.

In midday trading Thursday on the New York Mercantile Exchange, natural gas futures were at $2.839 per MMBtu, with the price down 4,5% from the market open.