BHP will not sell Fayetteville Shale assets, but future activity in doubt

Australian mining giant BHP Billiton announced today that it has been unable to find a viable suitor for its Fayetteville Shale operations, and is no longer seeking to sell the conglomerate’s unconventional natural gas in play in Arkansas.

“We have concluded the marketing of our Fayetteville acreage and have decided to retain it within our portfolio to maximize value,” BHP Chief Executive Andrew Mackenzie said in the company’s half-year earnings report. “The longer-term development of the Fayetteville remains an attractive option and with the majority of our acreage held by production, we will continue to defer investment for value, consistent with our long-term outlook for gas prices.”

Despite those assurances, BHP still plans to cut the company’s U.S. shale budget substantially for the remainder of the year. In BHP’s half-year review a month ago, Mackenzie reiterated that 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.

In today’s (Feb. 24) earnings report, BHP said as a result of the reduction in drilling activity, the company now expects onshore U.S. drilling and development spending at $3.4 billion for 2015, 15% percent below the previous guidance of $4 billion.

“A further reduction to approximately $2.2 billion is expected in the 2016 financial year,” the company said. “We continue to monitor market conditions and will exercise the flexibility within our shale portfolio to maximize value.

Last month, BHP spokeswoman Jennifer White told Talk Business & Politics that the world’s largest mining company was still looking for a hasty exit from its unprofitable foray into the Fayetteville Shale play as natural gas prices plummeted below $3 per million British Thermal units (mmBtu). In Tuesday’s trading session, natural futures on the New York Mercantile Exchange trading at $2.89 per mmBtu.

BHP ARKANSAS RIG COUNT DOWN TO ‘ZERO’
By rig count, BHP said that it planned to cut the total number of operating drilling pads in the U.S. from 26 to 16. In the Fayetteville Shale, that current rig count is at “zero” and its operational budget currently around the $100 million level, BHP’s financial reports show. In the first half of the year, BHP drilled and completed 27 wells in the Arkansas play, down 45% percent from a year ago.

Originally, BHP Billiton Petroleum, a wholly owned subsidiary of BHP Billiton Limited, paid $4.75 billion in cash in early 2011 to purchase nearly 487,000 net acres of leasehold and producing natural gas properties from Chesapeake Energy Corp. 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 four-fold 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.

Overall, BHP reported better-than-expected first-half earnings on Tuesday as the mining giant continue with its previously announced cost-cutting plan and efforts to refocus its worldwide mining operations. For the period ended Dec. 31, BHP reported underlying profit of $5.4 billion versus $7.8 billion a year earlier. Wall Street analysts had expected the Melbourne-based mining operator to report half-year earnings of $4.9 billion.