Must-know: Petroleum doing well, but potash is slow

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BHP’s petroleum and potash

BHP Billiton’s (BHP) petroleum and potash business includes conventional and unconventional oil and gas operations. The operations are located in six countries around the world. There’s also a potash development project in Canada. Its main assets include Onshore U.S.—shale fields, Gulf of Mexico, Bass Strait in the southeastern coast of Australia, and North West Shelf in western Australia.

Performance of Petroleum

 

Production

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Total petroleum production increased by 4% in fiscal year 2014 (or FY14). However, the highlight was the increase in liquids production. It was supported by a 73% increase in Onshore U.S. liquid volumes and nearly doubled production at Atlantis. This is important to note because liquid volumes are more profitable.

Financial performance

The average realized price of natural gas increased by 16% for the group. This was the major contributor to the $113 million price-related increase in earnings before interest and taxes (or EBIT). However, the EBIT for petroleum decreased by $115 million.

The onshore petroleum was behind expectations with earnings before interest, taxes, depreciation, and amortization (or EBITDA) and EBIT coming in at $2270 million and $-156 million, respectively. This was below the broad guidance BHP Billiton (BHP) gave in December, 2013.

It was also despite higher gas prices in the second half of 2014. The business doesn’t seem to have a positive cash flow for the next two to three years because of capital expenditure needs. The conference call pointed out that Hawkville’s technical issues are partially responsible.

It’s important to note that potash recorded an EBIT loss of $583 million.

Outlook

BHP’s margins should benefit from the shift towards higher-value products—liquids. However, crude and natural gas prices have been declining lately. Oil prices are affected by macroeconomic factors. Natural gas prices depend largely on the weather. Lower prices would impact the sale prices at oil companies like ExxonMobil (XOM), Chevron Corp. (CVX), and ConocoPhillips (COP). All of these companies are components of the Energy Select Sector SPDR ETF (XLE).

 

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