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BHP Billiton Is Deferring Petroleum Production, but Can It Generate Value?

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Nov. 20 2020, Updated 4:26 p.m. ET

Petroleum division

The key to understanding profitability for BHP Billiton’s (BHP) (BBL) Petroleum division is looking unit costs of petroleum and the company’s outlook on them 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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Activity firming?

Production in BHP’s Petroleum segment fell 15% YoY (year-over-year) to 106 MMboe (million barrels of oil equivalent) in 1HFY17. This was due to deferred development activity in US Onshore and the natural field decline in conventional oil.

BHP maintained its petroleum production guidance of 200 MMboe–210 MMboe for fiscal 2017. 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 mentioned during its conference call that it is not just deferring value in terms of price but also the potential of evolved technology which could lower the costs going forward.

Lowering costs

BHP’s conventional unit costs fell 10% to $8.4 per barrel during fiscal 1H17 due to a fall in workovers. The guidance, however, is unchanged at $10 per barrel as lower volumes are expected in the second half due to seasonal demand.

Oil prices remained strong in 4Q16 as OPEC (Organization of Petroleum Exporting Countries) agreed to cut its production. This and improved fundamentals led to the recovery in prices. BHP expects prices to remain supported in the short-term as inventory levels normalize. It believes that political uncertainty, OPEC (Organization of Petroleum Exporting Countries) compliance rates and rising US output could continue to offer headwinds going forward.

For now, however, firmer prices are positive for BHP’s petroleum division. They’re also positively affecting other oil companies such as ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP). Together, these three companies make up ~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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