Take a careful look at BHP Billiton (BHP) and US gas and oil prices and wonder if there are better times in the offing for the company’s onshore unconventional oil and gas business in the US which has been a massive loss-making disaster area for the board, management and shareholders in recent years.
BHP has written off well over $US20 billion on its US shale oil and gas plays – with most of the losses being taken in the gas sector as prices crashed to below $US2 a million British Thermal Units (MBTUs).
The most recent was at the start of this year with $10.3 billion written ($US7.2 billion) off in the February half year report.
February’s write down followed a $US2.8 billion impairment in 2012 after a sudden drop in gas prices, while last year BHP wrote off another $US2.8 billion due to geological issues in its Hawkville Basin acreage in the US.
February’s charge was about $US4.9 billion after tax and reflected the plunging in world oil prices and the continuing weakness in US gas prices.
BHP Billiton said it had lowered its future oil price expectations and altered its development plans, reducing the value of its onshore shale oil and gas assets to $US16 billion.
In particular, BHP Billiton cites ongoing weakness in US gas prices as a factor in the write down. The company last year said it needed $US60 a barrel oil and $US3 a mbtus for gas, to be cashflow positive from the shale oil and gas business in the US.
At the time of the write down being announced in early February, US oil futures were trading at just under $US30 a barrel, while US gas prices were below $US2.20 a mbtu.
Last week oil ended at just over $US50 a barrel in the US, while gas prices were trading just under $US3 a mbtu and are up 409% since February, thanks to rising demand for gas from the US power industry’s demand which is struggling to meet a rapid rise in demand for electricity caused by by a warm Spring and hot early summer.
In fact US natural-gas futures hit their highest close since May 2015 last Friday as the continuing warm weather and rising demand for electricity (to power air conditioners) continues to mop up the oversupply of gas.
August natural gas rose 6.3 cents, or 2.2%, to settle at $US2.987 per mbtus on the New York Mercantile Exchange last Friday. The settlement was the highest since May 18, 2015. Prices ran over $US3 a mbtu during the week for the first time in 14 months. The price has dipped to around $US2.79 this week in the unsettled market conditions.
Prices were up 12.2% last week as official figures showed the run up in demand has cut the growth in reserves.
The US Energy Information Administration (EIA) said late last week that total working gas reserves in underground storage across the US rose 37 billion cubic feet (Bcf) to 3.14 trillion cubic feet—above the five-year historical average. A year ago, the EIA reported a build of 73 Bcf and the five-year average climb is 78 billion, according to S&P Global Platts.
While storage reserves are near record levels for this time in the year (normally US gas reserves are built up in summer and early autumn ahead of peak demand for the northern winter), but the rate of reserve replenishment is currently well below average, hence the bullishness about gas prices.
The strength of the rebound in gas prices is uncertain, and the strength in global oil prices seems a bit stronger (but that also depends on uncertain global growth more than a fall in US oil production and in the global oil glut).
When the February write down was announced, BHP share prices were trading around $15 – $16.50. They closed at $18.71 yesterday after touching $19.53 earlier in the week.
But keep in mind the time bomb in the BHP story and that is the eventual cost of the dam disaster in Brazil. There are stories around that Samarco, the iron ore pellet joint venture with Brazil’s Vale, is running out of money and is restructuring and trying to defer loan repayments.
If BHP and Vale allow Samarco to collapse, their names won’t be worth very much and such a move will be (rightly or wrongly) viewed as a cynical attempt to soften the financial damage from the dam disaster.
And the settlement BHP and Vale reached earlier this year looks like it will need a lot more money to be acceptable to the Brazilian authorities.
