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BHP’s petroleum and potash segment to focus on cost improvements

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Production is above expectations

BHP petroleum and potash production was above market expectations due to continued momentum in the Black Hawk and the Permian, where liquids production increased by 81% and 107%, respectively.

In the company’s conventional business, liquids production at Pyrenees and Atlantis increased by 34% and 12%, respectively. The increases were supported by strong uptime performance and the completion of new production wells in the second half of the 2014 financial year.

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Lower EBIT owing to lower realized prices

The segment’s EBIT declined by 14.4% year-over-year to $2.14 billion due to a drastic decline in the realized prices of crude oil. Crude oil prices declined by ~17% from 1H14 and fiscal 2014 owing to strong supply and weaker demand.

Focus on cost improvements

BHP realized significant improvements in shale drilling and completions efficiency as drilling costs in the Black Hawk declined by 17% to $3.7 million per well during the period. Significant improvements in onshore US productivity underpinned an 8% decline in unit cash costs to $11.15 per barrel of oil equivalent.

In addition, as a response to weaker prices, BHP will reduce its onshore US operated rig count from 26 to 16 by the end of fiscal 2015. The majority of the revised drilling program will be focused on the company’s liquids-rich Black Hawk acreage with activity in the Permian and Hawkville.

Outlook for the segment

BHP’s guidance for fiscal 2015 remains unchanged at 255 million barrels of oil equivalent for petroleum.

Crude oil prices have declined rapidly in recent months to touch multi-year lows. Going forward, this will negatively affect BHP’s margins in this division. However, the company’s focus on core profitable assets and liquids could reduce costs and support margins to an extent.

Lower prices should also affect the sale prices of oil companies like ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP). Together, these three companies form ~34% of the Energy Select Sector SPDR ETF (XLE).

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