Plunging global energy prices yesterday forced BHP Billiton Ltd to book a US$7.2 billion pretax write-down against the value of its struggling onshore US assets, as the mining giant works to reign in costs and reduce risk.
The decision came as miners globally struggle to cope with collapsing commodity prices and China’s once insatiable appetite waning.
BHP spent US$20 billion in 2011 on shale oil and gas assets in the US, but the move increasingly appears to have backfired, with a dramatic fall in prices over the past 18 months hammering profits.
The hefty write-down, which is to be booked in its next half-yearly accounts due next month, equates to US$4.9 billion after tax and follows BHP taking a US$2.8 billion pretax hit on the same assets last year.
BHP Billiton chief executive Andrew Mackenzie blamed “significant volatility and much weaker” prices, adding that the company had been forced to reduce its medium and long-term price assumptions.
“Oil and gas markets have been significantly weaker than the industry expected,” he said in a statement. “We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the onshore US 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 write-down announced today.”
The write-down would reduce the book value of BHP Billiton’s US net operating assets to about US$16 billion.
“There’s potential I think for further write-downs if oil prices don’t recover,” CLSA’s head of resources research Andrew Driscoll said. “Probably more importantly is that you’ll expect that BHP will be managing its US onshore business for cash. So we’d expect rig counts to continue to decline and it’s likely that capex [capital expenditure] this year will be less than their guidance of US$1.4 billion.”
Mackenzie said the diversified miner’s investment and development plans for the remainder of the year are under review as it desperately looks to preserve cash, with no sign that the commodity price rout is over.
Oil and gas prices have fallen dramatically, with the US benchmark West Texas Intermediate crude hovering near 12-year lows at about US$31.20 a barrel, as investors worry about prolonged global oversupply and an uncertain demand outlook.
Despite this, Mackenzie said he remained “confident in the long-term outlook.”
“We are well positioned to respond to a recovery,” he added.
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