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Why Is BHP Still Investing in Exploration for Petroleum Division?

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Petroleum division

The key to understanding profitability for BHP Billiton’s (BHP) (BBL) petroleum division is unit costs of petroleum and the company’s outlook on it going forward. Profitability then impacts the company’s stock performance. In this part of the series, we’ll see how BHP is progressing on the cost front in its petroleum division.

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Reduced activity

  • Production for BHP’s petroleum segment declined by 6% YoY (year-over-year) to 240 MMboe (million barrels of oil equivalent). This was due to deferred development activity in US Onshore and the natural field decline in conventional oil.
  • Reduced activity also saw its rigs reducing to four from seven earlier. The company continues to defer development activity to preserve value.
  • The company expects petroleum production to decline further in fiscal 2017 to 200–210 MMboe.

Lowering costs

  • The company realized further improvements in shale drilling and completions efficiency. This came as its drill time and completion techniques showed marked improvements in Black Hawk and Permian.
  • Drilling times improved by 19% to 15 days per well in Black Hawk and by 22% to 26 days per well in Permian.
  • Drilling costs for BHP at Black Hawk came in at $2.3 million for fiscal 2016 compared to $3.4 million in fiscal 2015. Costs for Permian came in at $3.4 million compared to $4.6 million last year.

BHP management expects oil and US gas market fundamentals to remain healthy as growth intersects with slower global production growth due to falling production in the United States. It believes that higher prices will be needed to induce the new supply needed to offset natural field decline. The company mentioned that as the industry is cutting discretionary spend, it’s planning to invest $800 million in exploration in fiscal 2017.

For now, however, lower prices are negatively impacting BHP’s petroleum division. They’re also affecting other oil companies such as ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP). Together, these three companies form ~34% of the Energy Select Sector SPDR ETF (XLE).

In the next part, we’ll take a look at BHP’s balance sheet.

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