Shale Fail: BHP Admits $20 billion "Mistake" - Analysis

Energy

BHP Chairman Says $20 Billion Shale Investment “MISTAKE”

As the U.S. and Global Oil and Gas Industry continues to cannibalize itself to stay alive, the Shale Dominoes begin to fall as BHP Chairman announced its shale investment was a MISTAKE. Yes, it’s true, BHP Chairman Jacques Nassar said his company’s $20 billion shale investment six years ago, in hindsight, was a mistake.

According to the article, A $20 billion mistake: BHP Billiton chairman laments huge deal in US shale:

BHP entered the shale business at the height of the fracking boom in 2011 and invested billions more developing the operations. The fall in oil prices since then has led to pre-tax writedowns of about $13 billion on the business. Activist shareholder and hedge fund Elliott Management, holding 4.1 percent of BHP’s London-listed shares, has been trying to gain support from other shareholders to persuade BHP to sell the shale oil and gas business.

“If you had to turn the clock back, and if we knew what we knew today, we wouldn’t do it, of course we wouldn’t do it, but go back and put yourself in our position at that time,” Nasser told a business seminar, referring to the shale purchase.

“We bought exactly what we thought we were buying, but the timing was way off.”

While BHP Chairman Nassar stated that “the timing was way off” in its shale investment purchases, I really don’t think it was prudent “AT ANY TIME” to invest in shale oil and gas. BHP Billiton is making the case that they knew exactly what they were getting into, but they paid too much for their shale investments.

As the article states, BHP Billiton has written off $13 billion of their shale oil and gas investments. Assuming they purchased $20 billion in shale energy assets, they have written off 65% of their investment. This is a big deal because BHP Billiton is the second largest mining company in the world.

I was writing back at the time of BHP Billiton’s shale purchases that the company was making a BIG ERROR in judgement. However, with the oil price above $100 a barrel from 2011 to 2014, the market believed that shale was going to be the next best thing since sliced bread. Unfortunately, the U.S. shale oil and gas industry has been a dismal failure…. that is, if we consider it as a financial venture.

As I have posted in several articles, here is a table of the top U.S. shale oil and gas producers operating cash flow surplus-deficits since 2005:

Again, you will notice that up until 2008, the industry enjoyed an operating cash SURPLUS. However, since 2009, the top U.S. shale oil and gas producers have suffered an operating cash DEFICIT… and it even was worse from 2011-2014, when the oil price was over $100. So, it really didn’t matter WHEN BHP Billiton purchased its shale energy assets…. they were going to be LOSERS, regardless.

Now, if we go back to 2011, when BHP Billiton started purchasing its shale energy assets, we can clearly see how overly optimistic and wrong they were about the industry. In the Financial Times article, BHP in $4.7bn US shale gas assets deal:

BHP Billiton has moved to bulk up its energy holdings, entering the US shale market with a deal to buy Chesapeake Energy’s Arkansas-based gas business for $4.75bn.

The Anglo-Australian miner said on Monday that it would buy 487,000 acres of leasehold gas properties in the Fayetteville shale, funding the deal from its existing cash balances.

The assets, which currently produce about 400m cubic feet of gas per day, will increase BHP’s oil and gas reserves from current levels by about 45 per cent. The company sees potential to triple the production from the Fayetteville acreage during its 40-year operating lifetime.

BHP Billiton purchased Cheasapeake Energy’s Fayetteville Shale Gas assets in Arkansas for nearly $5 billion with the hopes of tripling its production over the 40-year operating lifetime. I find this quite amusing because most shale gas fields will peak within 5-8 years:

The Barnett Shale in Texas was the first large shale gas field exploited in the United States. While initial production began in the early 2000’s, it really didn’t start to take off until 2005. However, production peaked in the Barnett at 5.2 billion cubic feet per day (Bcf/day) in November 2011. This chart is a bit dated, but according to the most recent figures, production at the Barnett is down to only 2.8 Bcf/day…. a 46% decline from peak.

So, what does this tell us?? It shows us that U.S. shale oil and gas fields do not have a long lifespan. Which means, BHP’s statement that they planned on tripling shale gas production in the Fayetteville, was simply a delusion.

In looking at BHP Billiton’s actual petroleum production figures, we can plainly see that they totally overestimated their forecast for shale gas production in the Fayetteville:

BHP’s Shale gas production in the Fayetteville declined from 153 Bcf (per year) in 2014, to an estimated 96 Bcf in June 2017. That’s a 37% decline in three years... no where close to their forecast of a tripling of production. And it wasn’t just BHP Billiton that suffered declining shale gas production in the Fayetteville…. it was also the entire industry.

NOTE: BHP Billiton did not break down its individual U.S. gas production until 2014. So, the data for the Fayetteville only was available from 2014 onwards. Also, the figures for BHP’s Fayetteville shale gas production are for the entire year. Thus, it produced a total of 153 billion cubic feet of shale gas in the Fayetteville in 2014. This turns out to be about 0.41 Bcf per day.

Total shale gas production in the Fayetteville peaked at 2.9 Bcf/day in November 2012 and is currently producing 1.7 Bcf/day:

As we can see, shale gas production started to take off in 2006, but peaked just five years later in 2011. Thus, Fayetteville Shale gas production is already down 41% from its peak six years ago.

Now, this is only one example of the several shale energy assets that BHP Billiton has on its balance sheet. It also has U.S. shale assets in the Haynesville, Eagle Ford and Permian. For example, BHP’s Eagle Ford oil production is estimated to be down 50% from its peak in 2015:

BHP’s Eagle Ford Crude Oil & Condensate Production (in thousand barrels oil equivalent – Mboe)

2014 = 20,462 Mboe

2015 = 35,823 Mboe

2016 = 26,823 Mboe

2017 = 17,800 Mboe (Est.)

BHP’s Eagle Ford crude and condensate production peaked in 2015 at 35,823 Mboe, or 35.8 million barrels of oil equivalent and is estimated to be down to 17.8 million barrels in 2017. BHP’s financial year for 2017 ends on June 30th.

Lastly, here are the figures for BHP’s Haynesville shale gas production:

2014 = 183.5 Bcf

2015 = 162.5 Bcf

2016 = 136.6 Bcf

2017 = 99.0 Bcf (Est.)

As we can see, BHP’s Haynesville shale gas production is down even more than its Fayetteville production. According to my estimate of BHP’s Haynesville shale gas production of 99 Bcf (billion cubic feet) in 2017, it is down 46% from the 183 Bcf produced in 2014.

The evidence is quite clear. BHP Billiton thought they were going to strike it rich producing shale oil and gas in the United States. Unfortunately, the shale oil and gas industry has been a dismal failure as no one really made any money producing it. Sure, a few companies may have made some profits, but the energy industry as a whole spent more money drilling and producing shale oil and gas than they made from operating cash. Thus, they have added a great deal of debt to their balance sheets.

So, no…. we can’t blame BHP Billiton for not being able to make money producing shale oil and gas just because their expertise is more focused on mining. Again, NO ONE really made any money producing shale oil and gas in the United States. This is why the U.S. oil and gas industry is now staring at a HUGE DEBT WALL to become due over the next several years:

BHP Billiton is now trying to offload its increasingly worthless shale oil and gas assets to anyone that would buy them. According to the Financial Times article, BHP says it is willing to sell US shale business:

Andrew Mackenzie, BHP chief executive, said on Tuesday he was willing to sell its US shale business, as he prepared to meet Elliott Advisors for the first time since the activist investor called for a major restructuring of the world’s largest mining company by market capitalisation.

Elliott said last month that BHP should spin off its US petroleum business, which includes onshore shale assets as well as fields in the Gulf of Mexico, and the hedge fund also called on the Anglo-Australian company to simplify its corporate structure.

“If there is a natural owner out there who believes in more upside that can be achieved within this shale business than we do, we will be more than happy to talk turkey with them,” he added.

The important sentence in the article above is where BHP CEO, Mackenzie states, “If there is a natural owner out there who believes in more upside that can be achieved within this shale business than we do, we will be more than happy to talk turkey with them.” That is quite an amusing thing for the BHP CEO to say.

Why? Because there really isn’t much upside for U.S. shale oil and gas going forward. Also, it was quite interesting that Elliot Management, activist investor with 4.1% stake in BHP Billiton, wants the company to TOTALLY DIVEST itself from all Petroleum assets in the United States, not just the shale energy assets. This includes their Gulf of Mexico oil and gas assets as well.

I believe any company that purchases BHP’s shale energy assets is in for serious trouble. Unless they are able to acquire BHP’s shale energy assets for a large discount and then sell them for a profit to some other poor slob, it would be a big mistake to try and make money producing shale oil and gas from these assets.

While some companies are claiming that they can produce oil in the Permian for $30 a barrel, they seem to forget the massive amount of debt they have acquired on their balance sheets in producing shale for the past several years. Also, breaking even at $30 or $40 a barrel is not a good investment, especially when the industry is saddled with debt and paying upwards of 75% of its operating income to service it: