BHP Billiton CEO Andrew Mackenzie said the company overpaid for its U.S. shale in Arkansas, Texas and Louisiana and revealed plans to cuts its capital budget even further by 70% to only $5 billion worldwide.
Mackenzie’s 30-minute address at Bank of America Merrill Lynch 2016 Global Metals, Mining and Steel Conference in Miami last month painted a stunning picture of the rapid decline of the multinational mining, metals and petroleum giant, which only five years ago had a market capitalization just short of $350 billion and was among the top four largest publicly-traded companies in the world.
Speaking freely to investors and Wall Street analysts at the Merrill Lynch conference, Mackenzie said BHP Billiton has had to adapt over the past several years to the collapse of global commodity prices, from depressed copper, coal, iron ore and nickel prices to the historic drop-off in international oil and gas prices.
Mackenzie, who replaced former BHP Billiton CEO Marius Kloppers in 2013, said the now streamlined, Perth, Australia-based-industrial conglomerate is in a “new era” when glutted stockpiles of mining, metals and petroleum products will cause global commodity prices to remain low.
“We are in a new (period) of economic uncertainty, market volatility and geopolitical instability, an era where markets will remain oversupplied and sentiment will stay cautious, and therefore we expect a period of prolonged lower commodity prices,” he said.
Under his tenure as BHP’s chief executive, Mackenzie told Wall Street analysts he has focused on downsizing the company’s 40,000-plus global workforce, cutting operation and administrative costs and expenses across the board, shaking up the company’s senior management structure, and reducing the company’s capital spending globally.
‘POORLY TIMED’ SHALE DEALS
Before Mackenzie became BHP Billiton’s chief executive, the Australian multinational conglomerate’s fortunes peaked in fiscal 2010 when it reported net profits of nearly $22 billion and gave $15 billion back to shareholders through dividends and capital returns.
It was shortly thereafter that Australian conglomerate made a big bet in the rapidly expanding U.S. onshore shale oil and gas sector, paying $4.75 billion in cash in early 2011 to purchase nearly 487,000 net acres of leasehold and producing natural gas properties in the Fayetteville Shale from Chesapeake Energy Corp.
That deal was followed up by an even larger acquisition when the world’s largest mining giant paid nearly $15 billion to acquire Petrohawk Energy’s operated positions in the Eagle Ford, Haynesville and Permian shale plays. Altogether, those three shale basins covered more than one million net acres in Texas and Louisiana with estimated 2011 net production of approximately 950 million cubic feet equivalent per day.
Following those deals, BHP Billiton doubled down on those shale-play bets by announcing a $10.9 billion capex spending program in the U.S., including a plan to spend $800 million to $1 billion annually over the 10 years to develop the Fayetteville Shale and triple production in the unconventional natural gas development in north-central Arkansas.
Yet in a rare admission by a top multinational CEO, Mackenzie told investors and Wall Street analysts at the Merrill Lynch conference that BHP paid too much for the U.S. shale properties in Arkansas, Louisiana and Texas at the wrong time.
“So if I say in reflection about the shale acquisition, of course it was poorly timed because we bought it at a high time in the market,” said the Scotland native. “We do now believe going forward our shale assets were positively positioned to differentiate us from our peers because of this flexibility and quality of the resources. We are now have established the ability to move fast with the commodity price movements.”
700 WELLS UNDEVELOPED IN FAYETTEVILLE, HAYNESVILLE PLAYS
In the company’s dry gas holdings in the Fayetteville and Haynesville shale plays, Mackenzie said 700 wells there are still undeveloped and “they work very well at less than $3.50 gas.” However, he added that BHP does not have any immediate plans to invest in those areas, and also will not participate in new areas of the Fayetteville Shale play that are showing promise unless prices elevate above the breakeven point.
“With our ongoing productivity initiatives, we will wait for some price recovery and aim to reduce these breaking even (scenarios) much further to well below $3.50 (per million British thermal units (MMBtu),” he said.
In Arkansas, there have been no drilling rigs in operation in the Fayetteville Shale in 2016, according to Baker Hughes’ weekly rig count. The three largest shale producers, Southwestern Energy, BHP and ExxonMobil’s XTO Energy, have all pulled out their drilling crews in the Arkansas play and have not announced any plans to begin any new activity in 2016.
Since Mackenzie’s speech less than a month ago, BHP’s stock has languished between $26 and $30 a share on the New York Stock Exchange. In Monday’s session, BHP’s American Depositary Receipts (ADR) were up 27 cents at $27 per share in trading.
CAPEX BUDGET CUTS
Mackenzie also unveiled in his presentation that BHP was cutting its fiscal 2016 budget for the year ended upcoming fiscal year by 70% to only $5 billion. That is a 29% lower than the earlier forecast of $7 billion, and a significant drop off from capex spending of $21.4 billion and $10.4 billion in fiscal years 2014 and 2015, respectively.
At the same time, BHP also plans to slash its U.S. shale budget across the board by more than 50% to only $700 million, less than half of earlier capex expectations announced earlier this year. In addition, BHP will deploy only four rigs in its U.S. operations in 2016, down from its previous forecast of seven.
Still, the upbeat Mackenzie said BHP has significant value in undeveloped assets that it owns, particularly in the company’s liquids rich in central and west Texas that produce wet natural gas and crude oil. He said the company has identified several “large drilling prospects” that can be developed at less than $60 a barrel.
“We have the opportunity to create significant value within the liquids-rich fields of our onshore U.S. acreage, particularly in the Permian and Eagle Ford shale. In those areas we have 1,400 wells yet to be developed, or drilled and completed that could be competitive at oil prices of less than $60 per barrel,” said the BHP executive. “In the coming environment though, we are not rushing to do that, we are holding back …, and cash preservation is our focus.”