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Analyzing BHP’s Low Expectations for Petroleum Production in 2016

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Petroleum volumes

The petroleum division is gaining increasing importance in BHP Billiton’s (BHP) (BBL) overall product portfolio. The company’s petroleum division contributed ~32% to its overall EBITDA (earnings before interest, taxes, depreciation, and amortization) in fiscal 2015. The company’s fiscal year ends on June 30.

For investors interested in BHP and other oil companies such as Chevron Corporation (CVX), Exxon Mobil Corporation (XOM), and Occidental Petroleum Corporation (OXY), petroleum volumes and outlook on production are the key variables to watch, apart from oil prices (USO). CVX, XOM, and OXY account for 32.22% of the Energy Select Sector SPDR ETF (XLE).

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Petroleum production falls

BHP’s petroleum production declined by 4% YoY (year over year) to 64.5 MMboe (million barrels of oil equivalent) in 1Q16. Here’s a breakdown:

  • Crude oil, condensate, and natural gas liquids production declined by 1% YoY to 30.7 MMboe. Onshore liquids volume, on the other hand, increased by 17% YoY to 13.5 MMboe. The increase in production was due to the continued positive momentum in the Black Hawk and Permian. Liquids production increased by 25% and 103% YoY, respectively at these two fields.
  • In BHP’s conventional business, liquids production fell by 11% YoY, reflecting the impact of industrial action at Bass Strait and natural field decline across the portfolio.
  • Natural gas production also fell by 7% YoY to 203 bcf (billion cubic feet) due to lower onshore US gas volumes as management decided to defer development activity for longer-term value.

Production outlook weak

Despite these numbers, BHP Billiton maintained its petroleum production guidance of 237 MMboe for fiscal 2016. We should, however, take the following into account in any analysis:

  • This guidance implies a decline of 7% YoY. This is mainly because of lower planned capital investment across its operations. Management continues to defer the development of these assets for longer-term value.
  • Management expects conventional volumes to fall by ~4% YoY to 125 MMboe due to planned maintenance programs and natural field decline.
  • In onshore US production, management expects the annual volumes from Black Hawk and Permian fields to remain stable year-over-year despite lower capex (capital expenditure) spending.

BHP’s management believes that the development of emerging economies will continue to drive demand for crude oil. BHP also believes that a new, higher-cost liquids supply will need to be in place as low-cost fields decline.

But the question remains: Given these declines, will BHP have to borrow in order to maintain its progressive dividend policy?

Continue to the next and final part of this series to find out.

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