BHP downsizing Fayetteville Shale Play operations, continues spending cuts

Australia-based BHP Billiton on Tuesday (July 21) announced broad spending cuts that will see only $200 million spent in Arkansas’ Fayetteville Shale Play to maintain ongoing production at 45 natural gas wells the company has already drilled and completed.

BHP’s Fayetteville Shale drillings program has essentially come to a halt with plans to operate “zero” rigs operating in the Arkansas play in fiscal 2016, which began July 1.

The Sydney, Australia-based mining and industrial conglomerate will make further spending cuts to its U.S. onshore oil and gas development, pushing the Australia industrial giant’s current U.S. shale play budget down nearly 60% from $3.7 billion to $1.5 billion for the upcoming fiscal year.

Last week, BHP said that it expected to take a $2.8 billion pretax write-down of its U.S. shale gas operations, essentially mothballing its Fayetteville Shale drilling operations until natural gas prices return to higher levels.

BHP Billiton Chief Executive Officer Andrew Mackenzie provided an operational review of the company’s global operations after the close of market on Tuesday, which is about the same time the stock market opens on Wednesday in Australia. In his 22-page report, Mackenzie emphasized that BHP would go back to a “simpler portfolio” in fiscal 2016 by focusing on its core iron ore and copper mining businesses.

“Our businesses performed well over the 2015 financial year. We have improved the performance of our equipment, reduced costs, and increased volumes despite a significant reduction in capital spend,” Mackenzie said. “Our simpler portfolio following the demerger of South32 will help us maintain the pace of operational improvement, further supporting cash generation, margins and returns.”

Mackenzie added: “Although our decision to cut spending in the onshore US will mean deferring gas volumes in the near term, we expect to realize greater value by developing our acreage later.“

THE GAME PLAN
During the company’s six-month review in January, Mackenzie told analysts that the industrial mining giant was 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.

Still, BHP’s total U.S. petroleum production for 2015 increased by 4% to a record 256 million barrels of oil equivalent (MMboe). However, petroleum production is forecasted to decrease by 7% in the upcoming fiscal year to 237 MMboe.

“We anticipate a 19 percent decline in the combined production of the predominantly gas-rich Haynesville, Fayetteville and Hawkville fields as we continue to defer development of these assets for longer-term value,” the company said. “Conventional volumes are expected to decrease by approximately four per cent to 125 MMboe as a result of planned maintenance programs and natural field decline.”

BHP’s U.S. operated rig count has declined 54% from 24 to 10. During the 2015 financial year, the Australian industrial conglomerate said it moved quickly in response to lower prices and benefited from significant productivity improvements. And although the company has no rigs operating in the Fayetteville Shale, it has still been able to increase production from fewer wells – down to 45 from 71 a year ago.

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 natural gas 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.

THE OUTLOOK
Although Mackenzie indicated that BHP plans to ramp up U.S. production again once commodity prices improve, Wall Street and U.S. Department of Energy forecasters don’t see that happening in the near-term.

In its most recent short-term outlook, the DOE’s Energy Information Administration forecasts that international Brent crude oil prices will average $60 per barrel in 2015 and $67 per barrel in 2016. West Texas Intermediate, the benchmark U.S. crude, is forecasted to average about $5 a barrel less than its international market rival.

The Henry Hub natural gas spot price averaged $2.78 per million British thermal units (MMBtu) in June, a decrease of 7 cents per MMBtu from the May price. EIA expects monthly average spot prices to remain lower than $3 per MMBtu in July, and projects Henry Hub prices to average $2.97 per MMBtu in 2015 and $3.31 per MMBtu in 2016.

In Tuesday’s session on the New York Mercantile Exchange, natural gas futures rose 5.9 cents, or 2.1%, to $2.882 per MMBtu. West Texas light, sweet crude for August delivery closed at $50.36, up 21 cents.