BHP posts $102 million loss in Fayetteville Shale, plans more spending cuts in 2016

BHP Billiton’s Fayetteville Shale operations posted a loss of $102 million in the second half of fiscal 2015 as the mining giant suspended its drilling operations and announced plans for further spending cuts in its U.S. oil and gas operations for the third time in the past year.

The Sydney, Australia-based mining conglomerate, which first entered the Arkansas shale play in 2011 with an eye-opening $5 billion buyout of Chesapeake Energy, has no drilling rigs in operation in the unconventional natural gas development and plans to reduce its already bare-bones operating budget even further in 2016 due to depressed oil and gas prices.

“We have continued confidence in the quality of our onshore US acreage, and our track record in operating performance and capital productivity is among the best in the industry,” the company said in its recent 56-page financial report. “While we are focused on value and cash flow preservation as we manage through this period of lower prices, we retain the option to develop our resources as prices recover to maximize the value of these quality assets.”

Over the past year, BHP’s commodity-driven balance sheet has come under pressure as global copper, iron ore, uranium, coal, and oil and gas prices have all been caught in a global downturn. Companywide, BHP has now set a global capital budget of $7 billion in the 2016 financial year and $5 billion in the 2017 financial year, down 40% or $3.6 billion from the previous estimate only six months ago.

In the second half of 2015, BHP’s capital spending for its U.S. oil and gas operations was cut to only $1.5 billion with the Eagle Ford shale play getting the lion’s share of $1.2 billion. BHP spent only $38 million in the Arkansas shale play, mainly to develop the company’s 10 operating wells that produced a miserly $140 million in revenue.

Going forward in fiscal 2016, BHP said it will only spend $1.3 billion in its U.S. onshore, reducing its already depleted oil and gas drilling program from seven to five rigs.

BHP’s cost-cutting and no-drilling posture is dramatically different from five years ago when the global mining giant began snapping up attractive U.S. oil and gas assets to take advantage of oil prices that topped $110 a barrel at the time. In late 2011, shortly after the Australian 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.

Today, BHP’s U.S. onshore operations include dry shale gas production from the Haynesville and Fayetteville shale plays, and the company’s liquids rick focused areas in Texas’ Eagle Ford and Permian shale basins. The industrial and mining conglomerate also has deep-water oil and gas developments in the Gulf of Mexico, the Caribbean and the Beagle development off the coast of Western Australia.

Besides operating in the red in the Fayetteville Shale in the second half of 2016, the company’s highly-prized Eagle Ford and Permian basin shale operations produced losses of $639 million and $117 million, respectively. The dry gas Haynesville shale play, which encompasses parts of southern Arkansas, also reported a loss of $215 million on revenues of only $170 million, according to BHP’s financial report.

Like rivals Southwestern Energy Inc. and ExxonMobil’s XTO Energy, those mounting losses have caused BHP to halt all drilling activity in the Arkansas while at the same time publicly saying that the company’s dry gas assets in the unconventional shale play could support production for at least 50 more years.

“We know that we must get better in order to make the economic returns more viable in today’s price environment. That is precisely why I have challenged our team to become more efficient, reduce costs and safely achieve at least a 20% rate of return at a flat $3 Henry Hub gas price,” Tim Cutt, president of BHP Billiton’s petroleum operations, told Wall Street analysts late last year. “Based on the significant strides we have made in our focus areas; I am confident we will get there in the near future.”

On March 3, Moody’s Investor Service downgraded BHP Billiton’s credit rating two levels to A3 from A1. A3 is the seventh highest level of creditworthiness on Moody’s ratings scale and the current credit downgrade puts the company on negative watch only four notches above junk status.

“Moody’s views current weak commodity prices and softer demand as representing a fundamental shift in the operating environment beyond a normal cyclical downturn,” said the Wall Street rating service. “Moody’s views there to have been a fundamental downward shift in the global mining sector, with the downturn being deeper and the recovery likely to take longer than previously expected. This has resulted in increased credit risk and weaker financial metrics for companies across the global mining sector, including even the most resilient and highly-rated companies like BHP Billiton.”

In response, BHP has not only slashed its capital budget for 2016 but has also announced plans to lower its generous dividends as global commodity prices remain weak.

“Our new dividend policy and transparent capital allocation framework are part of a broader strategy to help BHP Billiton manage volatility. We have already responded decisively to the changed conditions,” BHP Billiton CEO Andrew Mackenzie said in the company’s recent financial report.

In January, BHP Billiton responded to declining oil and gas prices by saying it would recognize a pre-tax impairment charge of nearly $7.2 billion against the carrying value of its onshore U.S. oil and gas assets in the company’s upcoming financial results.

On Monday, crude oil prices were trading higher after Chinese Premier Li Kiqiang issued the country’s five-year economic plan. West Texas Intermediate, the U.S. premium light crude, rose 0.75% to $36.19 per barrel on the New York Mercantile Exchange.  The price of natural gas for April delivery rose 2.4 cents to $1.69 per million British thermal units.

In heavy trading in Tuesday session, BHP’s stock was trading higher on the New York Stock Exchange, up $1.49 or 5.4% at $29.17 as more than 9.2 million shares exchanged hands. The Australian industrial conglomerate’s stock has traded in the range of $18.46 and $52.46 over the past year.