BHP seeks ‘exit strategy’ for U.S. oil and gas operations; seeks bids for Fayetteville Shale play

Australia’s BHP Billiton announced Wednesday (Jan. 17) it plans to move forward with an exit strategy to divest its U.S. onshore operations, which includes the global mining giant’s Fayetteville Shale assets first purchased for nearly $5 billion seven years ago.

Under the company’s new U.S. exit strategy, BHP reverses plans announced just eight months ago to boost drilling programs in the Eagle Ford Shale in South Texas, the Permian Basin in West Texas and New Mexico, and the Haynesville Shale region spread across parts of East Texas, North Louisiana and South Arkansas.

“In onshore US, our operated rig count remained at nine during the December 2017 quarter but is expected to fall as we tailor plans to maximize value in the exit process,” BHP CEO Andrew Mackenzie said in a summary of the company’s half-year operation review. “We continue to progress a number of alternatives to divest our onshore US assets for value.”

In August, BHP Billiton officials first revealed that the company was pitching its Fayetteville Shale assets to interested buyers, hoping to get a premium offer for the emerging Moorefield “shale-within-a-shale” development in the Arkoma Basin.

“In the Fayetteville (Shale), our plans remain unchanged at this time. We continue to assess the potential of the Moorefield horizon based on data from the new non-operated wells,” Mackenzie said.

Under the new plans, BHP will cut its yearly U.S capital expenditure by 8.3% from $1.2 billion to $1.1 billion, reflecting development activity tailored to support value in the exit process and meet ongoing production obligations, Mackenzie said.

For the first six months of the company’s fiscal year 2018, onshore U.S. drilling and development expenditure through December was $511 million for operations in the Eagle Ford, Permian and Haynesville shale basins that produce both oil and gas.

In 2017, well after shutting down its drilling operations, BHP cut its Fayetteville Shale capital budget to a measly $9 million. The Australian industrial conglomerate, which has pivoted its focus back to its core cooper, iron ore and coal mining operations, was still able to produce earnings of $85 million on revenue of $273 million that came sole from sales of marketed natural gas from wells already in operation.

In fiscal 2016, BHP’s investment in the Arkansas play totaled $49 million, producing some $95 million in earnings on revenue of $246 million. As of today, BHP’s leasehold position of 487,000 net acres with an average operating stake of 58% still makes the Australian company the third-largest Fayetteville Shale operator behind Southwestern Energy Corp. and ExxonMobil’s XTO Energy.

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

$20 BILLION MISTAKE
BHP’s unenthusiastic approach on the Fayetteville Shale stands in stark contrast to the company’s plans first announced in February 2011, when Chesapeake Energy Corp. agreed to sell its Arkansas gas interests to BHP for $4.75 billion. At the time, BHP 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.

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

During the summer, BHP came 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.

Following Elliott’s dual-stock list proposal in July, BHP Chairman Jacques Nassar called the company’s $20 billion shale purchase nearly seven years ago a big mistake, according to Reuters article.

“If you had to turn the clock back, and if we knew what we knew today, we wouldn’t do it, of course we wouldn’t do it, but go back and put yourself in our position at that time,” Nasser said during a business conference in Sydney. “We bought exactly what we thought we were buying, but the timing was way off.”

MacKenzie said the Australian industrial giant, which reported annual revenue of $38.3 billion in fiscal 2017, now hopes to shed those operations any number of ways, including an outright sale, merger or initial public offering (IPO).

“We continue to progress a number of alternatives to exit our Onshore US assets for value. We are preparing all appropriate documentation ahead of data rooms being opened to potential trade sale buyers by the end of the March 2018 quarter,” said the BHP chief executive. “In parallel, we continue to explore a potential exit via de-merger or IPO.”