Will Capex, Dividend Cuts Help BHP Survive Prolonged Downturn?

(Continued from Prior Part)

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 article, we’ll see how BHP is progressing on the cost front in its petroleum division.

Reduced activity

• Production for BHP’s petroleum segment decreased by 5% year-over-year to 124.7 MMboe (million barrels of oil equivalent). This was due to deferred development activity in Onshore US and the natural field decline in conventional oil.

• Reduced activity also saw its rigs reducing to five from seven earlier. The company continues to defer development activity to preserve value.

Lowering costs

• The company realized further improvements in shale drilling and completions efficiency during the first half of fiscal 2016. This came as its drill time and completion techniques showed marked improvements in Black Hawk and Permian.

• Drilling costs for BHP at Black Hawk are expected to reduce further to $2.3 million per well in fiscal 2016. Management’s previous guidance was $2.5 million per well.

BHP management expects oil prices to remain range-bound in the short term. This is due to available supply capacity from the United States and OPEC (Organization of the Petroleum Exporting Countries). It expects the market to balance in 2017 as demand growth outpaces supply growth.

Falling oil prices amid resilient US oil supplies and incremental Iranian oil could pose a significant headwind for BHP’s petroleum division going forward. According to BHP’s sensitivity estimates, every $1-per-barrel drop in the price of oil leads to an after-tax impact of $60 million on net profit.

Lower prices should also affect sale prices of 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 and why it’s so robust.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - BHP Billiton’s First Half of Fiscal 2016: Why Were Profits Lower?

• Part 2 - Can BHP Billiton Catch Up with Rio Tinto in Iron Ore Unit Costs?

• Part 3 - How Is BHP Billiton Cutting Costs in Its Coal Segment?