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BHP Taking $2.8B Charge Against U.S. Onshore Assets

BHP Billiton Ltd., whose U.S. onshore portfolio has been slammed by misfires for more than two years, on Wednesday said it expected to write down $2.8 billion pretax, mostly for a natural gas-focused field in the Eagle Ford Shale.

The Hawkville field in South Texas "accounts for the substantial majority of this charge reflecting its geological complexity, product mix, acreage relinquishments and amended development plans," management said. The remainder of the writedown relates to a goodwill impairment associated with the 2011 Petrohawk Energy Corp. acquisition, which gave the Australian-based BHP its Eagle Ford portfolio (see Shale DailyJuly 18, 2011).

"While the impairment of the Hawkville is disappointing, it does not reflect the quality of our broader onshore U.S. business," said BHP Billiton Petroleum President Tim Cutt.

The announced writedown followed an operational review of the U.S. onshore portfolio. BHP is a major player in the United States with holdings in the Gulf of Mexico and in the onshore, where it has leaseholds also in the Permian Basin, and in the Fayetteville and Haynesville shales. Hawkville is one of three fields being developed in Eagle Ford, where BHP also is working the Black Hawk and Red Hawk fields.

"The Black Hawk continues to exceed expectations, the Permian offers significant upside across multiple zones and the Haynesville, one of the industry's premier dry gas positions, provides an excellent development option as market conditions improve," Cutt said. "With industry-leading drilling costs and recoveries, we are well positioned to realize significant value for shareholders as we develop our high-quality resource base."

There's no doubt, however, that the domestic onshore business has proven to be a drag on the diversified natural resources company. The former Petrohawk holdings haven't proven to be the bonanza that was expected (see Shale DailyAug. 13, 2012). Other U.S. onshore holdings also have pressured earnings. It took a $266 million writedown on its Permian assets in 2013. In 2012, it took another $2.8 billion writedown on its Fayetteville assets (see Shale DailyAug. 7, 2012). The Fayetteville assets were put up for sale last fall (see Shale DailyOct. 27, 2014). However, there's been little interest from potential buyers, a source told NGI's Shale Daily.

With commodity prices in the dumps, BHP already had planned to reduce its 2015 U.S. rig count to 16 from 26 (see Shale DailyJan. 21). It said Wednesday it now plans to operate only 10 rigs in the U.S. onshore in 2016 with a spending plan of $1.5 billion, less than half of what it planned to spend this year.

At an oil price of $60/bbl West Texas Intermediate and a natural gas price of $3.00/Mcf Henry Hub, "the group expects its onshore U.S. business to be free cash flow positive in the 2016 financial year," said management. More guidance is to be issued in an operational review on Wednesday (July 22). The broader carrying value assessment of the group's assets is to be finalized by Aug. 25.

The latest writedown is huge, but it's lower than JPMorgan Chase & Co. analysts had expected. "Given the deteriorating conditions of the U.S. oil and gas market, we thought an impending impairment could have been larger."

RBC Capital Markets analysts said the writedown "is broadly in line with our expectations, although [it is] likely to be toward the lower end of market expectations." Further writedowns are "contingent on the gas price outlook...The carrying value of the U.S. onshore business will now stand at $20 billion (net of the $4 billion deferred tax liability)...A positive longer-term gas view is likely to be supporting the Haynesville and Fayetteville carrying values; any change to that would likely result in further writedowns."

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