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BHP Taking $7.2B Impairment Against U.S. Unconventional Leaseholds

BHP Billiton Ltd., one of the largest foreign investors in the U.S. onshore, said Friday it would take a $7.2 billion pre-tax impairment charge against the carrying value of its unconventional leaseholds in the Permian Basin and Eagle Ford, Haynesville and Fayetteville shales.

The charges, estimated at $4.9 billion after-tax, would reduce the global conglomerate's U.S. onshore net operating assets to about $16 billion.

"Oil and gas markets have been significantly weaker than the industry expected," CEO Andrew Mackenzie said. "We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the onshore U.S. business from 26 a year ago to five by the end of the current quarter. While we have made significant progress, the dramatic fall in prices has led to the disappointing writedown...However, we remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery."

The impairment, to be recognized in financial results for the second half of 2015, follows a biannual review and "reflects changes to price assumptions, discount rates and development plans which have more than offset substantial productivity improvements," the Australian operator said.

BHP already had suspended its onshore dry gas development and reduced its rig count sharply to focus only on liquids prospects. The number of operated rigs in in the U.S. onshore business is being cut to five from seven by the end of March. Three rigs would be working liquids targets in the Eagle Ford's Black Hawk field, and two rigs are scheduled to work in the oily Permian.

"Beyond this, investment and development plans for the remainder of the 2016 financial year are under review, with a focus on preserving cash flow," management said.

Since July, BHP has written off almost $10 billion for its U.S. onshore portfolio. The producer also works in the Gulf of Mexico, but its domestic onshore assets haven't paid off for the past four years or so.

A $2.8 billion pre-tax charge in July was mostly against the gas-weighted Eagle Ford assets (see Shale DailyJuly 16, 2015). It also recorded a $266 million writedown in 2013 against its Permian leasehold. And in 2012, a $2.8 billion impairment was taken for the gas-heavy Fayetteville (see Shale Daily, Aug. 7, 2012).

The U.S. gas price "remains low, as industry-wide productivity improvements have resulted in higher than expected supply at lower cost," the operator said. Medium and long-term gas price assumptions also have been reduced. In addition, the oil price has fallen by more than 30% over the last three months following the disruption of OPEC and stronger than anticipated non-OPEC production. Although we expect prices to improve from their current lows, we have reduced our oil price assumptions for the short to medium term.

"Our long-term price assumptions continue to reflect the market's attractive supply and demand fundamentals," said management. "The increased volatility in prices has also increased the discount rates applied by BHP Billiton, which has a significant flow through impact on the company's assessment of its onshore U.S. asset value."

The broader carrying value assessment of the group's assets is to be finalized in conjunction with the interim financial results scheduled to be released on Feb. 23.

Also taking a writedown for the value of its U.S. onshore properties is Tokyo Gas Co. Ltd., which said Friday it expects to book about $90 billion (10.6 billion yen) during 4Q2015 for impairments to Barnett Shale gas development in Texas. Three years ago Japan's largest city gas supplier bought a 25% interest in Quicksilver Resources Inc.'s Barnett leasehold for $485 million (see Shale DailyApril 2, 2013). Quicksilver, which operates the leasehold, filed for bankruptcy protection last year (see Shale DailyMarch 18, 2015).

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