BHP’s Fayetteville Shale assets still on the auction block

by Wesley Brown ( 459 views 

Rig operation in Arkansas' Fayetteville Shale Play. (Image from BHP)

Industrial mining conglomerate BHP Billiton said Tuesday (Aug. 22) it is still seeking to auction off the company’s Fayetteville Shale assets to interested buyers, hoping to get a premium offer for key assets in the emerging Moorefield development in the Arkoma Basin.

Following the release of the company’s full-year results for the year ended 2017, BHP CEO Andrew Mackenzie said the Australian conglomerate’s board and management has determined “that onshore US assets are non-core and options to exit these assets are being actively pursued.”

“We will be flexible with our plans and commercial in our approach. We are examining multiple alternatives but will only divest for value,” Mackenzie said. “Execution of these options may take time which we will use to continue to complete our well trials, acreage swaps and investigate mid-stream solutions to increase the value, profitability and marketability of our onshore US acreage.”

BHP first announced the review of its non-core U.S. operations in the third quarter when Mackenzie said the company has to do more to increase investor returns following the recent sale of more than $7 billion in global assets and the restructuring of company executive ranks that removed several layers of management.

Over the past four months BHP has come under pressure from New York City-based Elliott Associates and other investors to split the Australian conglomerate into two separate, publicly-traded entities. Under its complex “dual-listing” corporate structure, BHP is now headquartered in Melbourne, Australia, but still has two separate legal stock listings on the London Stock Exchange and the Australian Securities Exchange.

Although BHP’s board has staved off the proposal to split the company’s operations into two publicly traded concerns, Mackenzie and his management team have accelerated efforts to cut debt, reduce capital spending and provide better returns for shareholders.

“We had a very strong financial year. Free cash flow was $12.6 billion, our second highest on record. We used this cash to reduce net debt by nearly $10 billion and return $4.4 billion to shareholders,” Mackenzie said. “Productivity gains across our simpler portfolio of tier one assets increased our return on capital to 10%.”

Still, the world’s largest mining operator missed Wall Street’s earnings target of $7.4 billion for the year ended June 30, reporting net earnings of $6.7 billion as prices for mining commodities such as iron, ore and copper continued to improve. In response, Mackenzie reiterated the company’s efforts to focus on its core mining areas and offshore oil and gas drilling in the Gulf of Mexico and Trinidad, while exiting the unprofitable U.S. onshore energy business.

In the past 12 months, BHP has accelerated its investment in the Gulf of Mexico, offering winning bids in Mexico’s first-ever oil and gas auction in late 2016. Going forward, BHP said it now plans to shift much of its oil and gas spending in fiscal 2018 to both the Mexico and U.S. sides of the deepwater oil and gas development.

In the company’s onshore U.S. business, BHP said it only expects to spend up to $1.2 billion in fiscal 2018 to add up to five additional rigs in Eagle Ford and Permian basin shale plays in West Texas and the Haynesville natural gas field in Louisiana. However, the Australian mining operator has targeted no capital outlays for the Fayetteville Shale, which drilling crew exited nearly two years ago.

In 2017, despite a measly capital budget of $9 million and no rigs in operation, BHP was still able to produce earnings of $85 million on revenue of $273 that came sole from sales of marketed natural gas from wells already in operation. In fiscal 2016, BHP’s capital spend in the Arkansas play totaled $49 million, producing some $95 million in earnings on revenue of $246 million.

BHP’s unenthusiastic approach on the Fayetteville Shale stands in stark contrast to the company’s plans only six years ago, when Chesapeake Energy Corp. agreed to sell its Arkansas gas interests to the Australian miner for $4.75 billion. At the time, BHP said it planned to spend $800 million to $1 billion annually over the next decade to develop the Fayetteville Shale and triple production in the unconventional natural gas development in north-central Arkansas.

Today, BHP’s leasehold position of 487,000 net acres still makes it the third-largest Fayetteville Shale operator behind Southwestern Energy Corp. and ExxonMobil’s XTO Energy with, an average operating stake of 58%.

The company’s inventory in Arkansas also includes 871 productive wells at the end of fiscal 2017, down slightly from 945 in the same period a year ago. Nearly all of those wells are likely to remain undeveloped until a sale occurs, or natural gas prices rise well above current levels, BHP officials said.

“At this point we do not anticipate any operated development in the Fayetteville, however we continue to work with joint venture partners to assess the potential of the Moorefield horizon through non-operated activity,” said MacKenzie said after reviewing the company’s operating and financial performance in 2017.