Why BHP’s Guidance for Petroleum Production in Fiscal 2017 Is Low


Jul. 27 2016, Updated 9:05 a.m. ET

Petroleum volumes

The Petroleum division is an important contributor for BHP Billiton (BHP) (BBL). BHP’s Petroleum division contributed ~32% to its overall EBITDA[1. earnings before interest, tax, depreciation, and amortization] in fiscal 2015.

For investors interested in BHP and other oil companies such as Chevron (CVX), ExxonMobil (XOM), and Occidental Petroleum (OXY), petroleum volumes and outlook on production are the key variables to watch, apart from oil prices (USO). CVX, XOM, and OXY account for 36% of the Energy Select Sector SPDR ETF (XLE).

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Fall in petroleum production

BHP’s petroleum production fell by 6% YoY (year-over-year) to 240 MMboe (million barrels of oil equivalent) in fiscal 2016. Here’s a breakdown:

  • Crude oil, condensate, and natural gas liquids production fell by 7% YoY to 116 MMboe. Onshore liquids volume also declined by 13% YoY to 48 MMboe. While the production at the Permian shale increased, temporary deferral of activity at Black Hawk and drilling activity at Hawkville offset that rise.
  • In BHP’s conventional business, liquids production was largely unchanged YoY as new production wells at Atlantis, Mad Dog, and Pyrenees offset the natural field decline.
  • Natural gas production also fell by 5% YoY to 745 bcf (billion cubic feet) due to lower onshore US gas volumes, as management decided to defer development activity for longer-term value.

Production outlook

BHP achieved its production guidance for fiscal 2016. Let’s see what is the company guiding for fiscal year 2017.

  • BHP is guiding for petroleum production of 200 MMboe to 210 MMboe for fiscal 2017, which is lower than the Market’s expectations. This is because BHP has reduced its capital expenditure guidance for this division, which will lead to lower production.
  • Management expects conventional volumes to decline to between 123 MMboe to 127 MMboe for fiscal 2017. It is mainly due to the divestment of its gas business in Pakistan and natural field decline.

The rig count was again reduced from five to four during the June quarter. This is due to this pullback in investment that volumes are being negatively impacted. Oil capex has also been cut again from $2.1 billion to $1.4 billion. The US onshore capex is $600 million while that for conventional oil is $800 million.


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