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BHP Billiton slashes $2.5B of capital spending

BHP Billiton slashes $2.5B for capital spending

According to Deutsche Bank, BHP Billiton (BHP) jumps on the capital spending bandwagon and is expected to cut $2.5 billion from its onshore U.S. petroleum business over the next four years.

As reported by Western Australia Today, Paul Young, a mining analyst with Deutsche Bank, said, “BHP’s strategy of focusing its U.S. onshore petroleum activities on oil and gas liquids has come under pressure from the fall in the price of benchmark crude oil prices to below $65 a barrel.”

The company is planning on delaying any increase in drilling rig numbers in the Permian Basin and is expected to defer infrastructure investment. The Permian Basin has been one of BHP’s most impressive shale holdings, but for more wells to be developed oil prices need to get back up to $80 per barrel.

According to Young, with oil prices being as low as they are, BHP’s wells in the Permian Basin aren’t clearing the cost of capital.  The company’s wells in the Black Hawk shale and in the Eagle Ford shale are just barely clearing in internal rate of return of 20 percent.

BHP has 25 total onshore rig operations in the U.S., 17 of them are located in the Eagle Ford shale.

According to the Western Australia Today, “Young has also revised production guidance down for BHP’s onshore petroleum division over the next four years on the back of pushing out investment in the Permian, where the miner has 450,000 acres. BHP’s target export rate of 100,000 barrels of oil equivalent a day from the Permian will not be hit until 2020, he says.”

Young commented on BHP’s plans for the Permian Basin:

***We expect BHP to conserve their Permian acreage keeping their rig count in this field at four and delay infrastructure capex (capital expenditure) until the oil price increases to $80 a barrel, which we expect only in financial 2018 … This is the price required for Permian wells to generate a 20 percent IRR (internal rate of return).

To read the full article about BHP’s plans in the Permian Basin by Western Australia Today, click here.

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