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Is Deferring Petroleum Production for Value Working for BHP?

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Petroleum volumes

BHP Billiton’s (BHP) Petroleum segment is an important contributor to the company. It contributed ~30.0% of the company’s overall EBITDA (earnings before interest, tax, depreciation, and amortization) in fiscal 2016.

For investors interested in BHP and other oil companies such as Chevron (CVX), ExxonMobil (XOM), and Occidental Petroleum (OXY), petroleum volumes and production outlook are the key variables to watch, in addition to oil prices (USO). CVX, XOM, and OXY account for 35.0% of the Energy Select Sector SPDR ETF (XLE).

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Fall in petroleum production

BHP’s petroleum production for 1H17 fell 15.0% YoY (year-over-year) to 105.9 MMboe (million barrels of oil equivalent).

  • Crude oil, condensate, and natural gas liquid production fell 20.0% YoY to 48.2 MMboe. Onshore liquid volume fell 37.0% YoY to 16.4 MMboe. Although production at the Permian Basin rose, a temporary deferral of activity at Black Hawk and drilling activity at Hawkville offset that rise.
  • In BHP’s conventional business, liquid production fell 7.0% YoY. Higher production at Bass Strait, North West Shelf, and Mad Dog was offset natural field decline across the portfolio and planned maintenance at Atlantis.
  • Natural gas production fell 10.0% YoY to 347 bcf (billion cubic feet). Management decided to defer development activity for longer-term value, leading to lower onshore US gas volumes.
  • In September 2016, BHP announced the sale of its 50.0% interest in undeveloped Scarborough-area gas fields. ExxonMobil will remain the operator of Scarborough.

Production outlook maintained

  • BHP maintained its petroleum production guidance of 200 MMboe–210 MMboe for fiscal 2017. As the company reduced its capital expenditure guidance for the division, which will lead to lower production, the 2017 guidance is lower than its volumes for fiscal 2016. 
  • This guidance includes 123 MMboe–127 MMboe for conventional volumes and 77MMboe–83 MMboe for onshore US volumes.

During the December quarter, BHP’s rig count rose from two to three, following the successful execution of its hedging pilot. Additional hedge activity has also led to the approval of a second rig in Haynesville, where operations are expected to start in March 2017. BHP deliberately reduced petroleum production in 2016 as prices remained low. It wanted to defer development to generate higher value from these assets when prices return to more normal levels. With higher crude higher prices following OPEC’s (Organization of the Petroleum Exporting Countries) decision to cut output, this decision seems to have worked in BHP’s favor.

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