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The Biggest Foreign Shale Driller in the U.S. Just Took A $7 Billion Hit

It's not only the logo that's dripping red.It's not only the logo that's dripping red.
It's not only the logo that's dripping red.Photo: Ryan Pierse/Getty Images

BHP Billiton Plc (BHP), the biggest foreign-owned player in the U.S. shale oil patch, said Friday it was writing $7.2 billion off the value of its operations there, blaming “significant volatility and much weaker prices.”

The news comes in the week that crude oil prices have fallen below $30 a barrel for the first time in nearly 13 years. The product of an era where prices were $100/bbl or more, much of the U.S. shale industry is fundamentally economic at current price levels.

It’s been a miserable few months for Australia-based BHP, which is chiefly a mining company rather than an oil one. The company has also seen prices for its most important product, iron ore, collapse in the last few months due to the economic slowdown in China. BHP, like many of its biggest competitors, has refused to rein in production.

To make matters worse, the company is facing huge legal bills after a dam holding back waste water from a mine in Brazil that it jointly owns burst in December, causing a lethal flood and a trail of pollution hundreds of miles long. The Brazilian government has provisionally estimated the damage from that at $5.2 billion.

BHP said it has cut the number of its drilling rigs from 26 a year ago to seven at present, and that it will fall to five by the end of March–three in the Black Hawk region, and two in the Permian basin in Texas.

“While we have made significant progress, the dramatic fall in prices has led to the disappointing write down announced today,” chief executive Andrew Mackenzie said in a statement. “However, we remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery.”

 

BHP had bought its shale assets in a couple of separate deals for around $20 billion in 2012, and had already written some $5.6 billion off them in two stages over the last three years.

The after-tax write-down will be $4.9 billion, and will be booked in the company’s interim earnings that are due to be released on Feb. 23.

The company’s shares fell another 6% on Friday’s news to be close to a 12-year low, on growing fears that it will be forced to cut its dividend. Analysts at Barclays said in a note that there will be plenty more of the same to come from shale producers and miners in the upcoming earnings season.

“We doubt impairments will be just limited to BHP Billiton in the upcoming results season given the situation with commodity pricing generally,” they wrote.