Evan Vitale Consulting: BHP Flags Write-Downs in Petroleum Business

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Workers at BHP Billiton's Macedon gas plant in Australia’s Western Australia state.

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Workers at BHP Billiton’s Macedon gas plant in Australia’s Western Australia state.

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Rhiannon Hoyle

Rhiannon Hoyle

The Wall Street Journal

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rhiannon.hoyle@wsj.com

@RhiannonHoyle

Updated Jan. 21, 2015 1:21 a.m. ET

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SYDNEY—

BHP Billiton

Ltd.

flagged up to $250 million in write-downs on its petroleum business and a sharp reduction in U.S. drilling activity, in the latest example of falling oil prices roiling a major energy producer.

The world’s No. 1 miner has pivoted more toward the energy industry in recent years, gambling on the prospect of growing demand, particularly from rapidly expanding economies including China. It has spent billions building out its business to become one of the biggest petroleum producers outside of the major integrated oil companies in places such as the U.S. and Australia.

However, it now joins those global energy companies writing down assets and cutting back spending on energy projects to protect profits after a shock oil-price collapse.

Suncor Energy

Inc.

said this month it would cut its 2015 capital spending by 1 billion Canadian dollars (US$826 million) in response to the drop in prices. Houston-based

ConocoPhillips

last month said it planned to lower its spending by 20% in 2015. Last week, U.K.-listed Premier Oil PLC said it expected to take a write-down of $300 million against its assets.

Oil prices plunged from more than $100 a barrel in June to less than half that level now, the casualty of a surplus brought on by booming U.S. production and weaker-than-expected demand.

BHP Chief Executive Andrew Mackenzie

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BHP Chief Executive Andrew Mackenzie

Bloomberg News

“In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore U.S. business by approximately 40% by the end of this financial year,” said BHP Chief Executive

Andrew Mackenzie.

The asset write-downs in the petroleum division relate to the sale of oil assets in North Louisiana and gas assets in the Permian Basin in Texas.

BHP has also faced recent trouble in the iron ore and coal sectors—two of the four so-called pillars of its business—in which it has curbed spending due to a market glut and sharp fall in prices.

Investors and analysts say it could just be a taste of what’s to come.

“It is certainly going to be an ongoing theme,” said

Ben Lyons,

a Sydney-based portfolio manager at ATI Asset Management, which has a small holding in BHP. “In our opinion, they will only continue and they will increase in size as the company is forced to recognize the very poor investment that was made under previous management.”

Former BHP chief

Marius Kloppers

plowed about $20 billion into U.S. shale-gas businesses in 2011 and BHP has since spent billions of dollar a year exploring and developing its assets. In October, the company decided to cut its losses on the poorly timed

Chesapeake Energy

investment that year by putting its fields in Fayetteville, Ark., up for sale. It is continuing to look for a buyer.

On Wednesday, BHP, which also has oil-and-gas interests in Australia, the Gulf of Mexico and Trinidad and Tobago, also cut its projection for full-year petroleum exploration expenditure by 20% to $600 million. It said it would update its separate U.S. onshore drilling and development budget for the full fiscal year next month.

The moves came as BHP reported higher production of key commodities in the six months through December, including a 15% increase in Australian iron-ore output and a 21% rise in metallurgical coal production. However, the company, which is based in Melbourne, Australia, also said it was likely to take an impairment charge of up to $350 million after failing to find a buyer for its Australian nickel assets.

Until recently, its energy division provided a hedge against falling prices of other commodities, such as iron ore and base metals.

“Now that has turned against them and is benefiting companies like Rio Tinto, for whom a falling oil price is a significant positive,” said ATI’s Mr. Lyons.

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For investors, the oil rout also pushes out the prospect of materially higher capital returns. Fund managers said they see no scope for additional capital management initiatives, such as special dividends or share buybacks, at current commodity prices.

BHP disappointed investors last August when it failed to outline any plans to buy back stock, with analysts having earlier forecast a capital-management program worth as much as $5 billion. Its Australian stock is down 26% on a year ago.

“Capital management is well off the table at the moment—the question now is how BHP will even continue the ratcheting-up of its dividend,” said

Robert Hook,

a Melbourne-based fund manager at SG Hiscock & Co., who has sold down his interest in BHP.

The oil rout has prompted some fund managers to question whether BHP may be losing some of its most prospective assets as it prepares to spin out facilities including aluminum smelters to focus on oil, iron ore, coal and copper—all of which investors have soured on in recent months. Mr. Mackenzie on Wednesday defended the spinoff, though, saying it would result in a better performance from both BHP and the proposed new company, South32, by simplifying the businesses.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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