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BHP’s US Onshore Takes Another Hit—Is There More to Come?

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Onshore US asset review

BHP Billiton (BHP) (BBL) did a review of its US Onshore assets on January 15, 2016. A biannual review is done for the company’s asset values. In this article, we’ll see how the asset values for BHP’s petroleum division may have changed after this review.

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Substantial impairment charge

BHP announced an impairment charge of $4.9 billion post-tax on its US Onshore business. After this, the carrying value of the business will be ~$16 billion. In Is the Case for a Dividend Cut Crystallizing at BHP Billiton? we addressed how BHP’s petroleum division could report more impairments.

The company mentioned that the impairment was due to weaker oil (USO) and gas prices and an increased discount rate. The increase in discount rate is mainly due to increased volatility. However, BHP maintained that the impairment is due to a fall in prices, and it remains confident about the long-term outlook and the quality of the acreage.

Capex revised down

The company also revised its capital expenditure (or capex) plans in shale as expected. It brought down its number of drill rigs from seven to five (from 26 one year ago) for the end of March 2016. Even beyond this, the company’s investment and development plans are under review, with a focus on preserving cash flow. The lower rig count will impact production negatively.

Oil price outlook

While BHP expects a medium-term recovery in oil and US gas prices, it believes near-term volatility will continue. Under current spot prices, BHP is expected to continue to struggle to bring this division into the positive cash flow zone. If the current oil and gas price scenario persists, BHP may be forced to book even more impairments and lower rig counts further.

US-based (SPY) energy companies such as ConocoPhillips (COP), ExxonMobil (XOM), Chevron (CVX), and Pioneer Natural Resources (PXD) are also being impacted due to the oversupply and weaker demand scenario.

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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