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U.S. Shale Patch Blows Cold on Australia's BHP

Australia's BHP Billiton Ltd. took a $2.84 billion pre-tax charge against the value of dry gas assets in the Fayetteville Shale that it acquired just last year due to weak natural gas prices and oversupply. Further, the company's once-touted Petrohawk Energy Corp., also bought last year, so far this year has been a loss-maker.

It was less than a year ago that petroleum unit chief J. Michael Yeager boasted that recent deals had put the company in the "shale of the shales" (see NGI, Nov. 21, 2011). Now, Yeager and the company's CEO are foregoing bonuses due to the poor result.

"The Fayetteville charge reflects the fall in United States domestic gas prices and the company's decision to adjust its development plans by shifting drilling from dry gas to the more liquids-rich fields," said CEO Marius Kloppers. "While we have responded appropriately to the changed market conditions today's impairment is clearly disappointing."

BHP bought the now-tarnished Fayetteville assets from Chesapeake Energy Corp. in February 2011 for $4.75 billion in cash (see NGI, Feb. 28). This deal and BHP's later buyout of Petrohawk for $12.1 billion (see NGI, July 18) were the cause of Yeager's earlier enthusiasm.

While Fayetteville natural gas sales have grown at an annualized trend-line rate of 20.1% since January 2010, that rate has leveled off at a -0.1% annualized rate since October 2011, according to data from the Arkansas Oil & Gas Commission.

Buying Petrohawk gave BHP a substantial presence in the Eagle Ford Shale in South Texas, the Haynesville Shale in North Louisiana and East Texas and the Permian Basin in West Texas. BHP said it had concluded that the value of the more liquids-oriented Petrohawk assets was not affected by the write-down. The development of these assets is expected to create substantial, long term shareholder value, the company said.

"The [BHP] board remains of the view that the investment in the U.S. shale assets is the right decision for BHP Billiton shareholders," said BHP Chairman Jac Nasser. "The assets we acquired, in particular the substantial Petrohawk business, are of high quality and will generate good returns for shareholders. The board supports the actions of [Kloppers] and Petroleum CEO, Mike Yeager, to optimize shareholder value by shifting our current drilling plans from the dry gas fields in Fayetteville and Haynesville, to the liquids-rich fields in the Permian and Eagle Ford."

However, during the second quarter the Petrohawk unit posted a loss of $46.4 million versus a profit of $74.8 million during the year-ago quarter. For the first half of the year, Petrohawk lost nearly $101.8 million compared with a profit of nearly $42.9 million during the year-ago period. Marketing revenues during the second quarter were nonexistent, compared with nearly US$149.5 million a year prior. Total Petrohawk operating revenues were $487.1 million during the second quarter, down from $597.4 million during the year-ago quarter.

Nasser added that the effect low U.S. gas prices has had on the value of the Fayetteville assets is "very disappointing" and that both Kloppers and Yeager had agreed to forgo 2012 bonuses. He did, however, express confidence in the future value of the Fayetteville holdings and the company's U.S. shale strategy, as did Kloppers.

"Our decision to enter the North American shale hydrocarbon business about 18 months ago was taken after extensive deliberation and due diligence," Kloppers said. "Our work convinced us that this significant, low-carbon fuel source would play a meaningful role as the world makes its future energy choices. We are still of this view, particularly given the ongoing positive technological advancements in the shale industry.

"We believe that our dry gas assets are well positioned for the future given their competitive position on the industry cost curve. In the short term, the accelerated development of our liquids-rich shales will continue to complement investment in our traditional project pipeline given the high rates of return on offer and the rapid payback on incremental investment."

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