BHP sees massive impairment in oil

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BHP has announced a pre-tax impairment of US$7.2 billion ($10.3 billion) on its US onshore oil and gas assets.

It comes after a review into the company’s assets.

This is another blow for the resources giant, which has shed more than 35 per cent of its value since November, with its shares closing below $15 at $14.77 – the first time it has breached this watermark since May 2005.

Much of this decline was driven by a disruption of OPEC,  an increase in production efficiency – allowing for increased supply  out of non-OPEC sources –combined with plummeting energy prices, as oil falls 30 per cent within the space of three months.

Iron ore shedding its value, trading at US$41.19 overnight, and a weak copper price has also worked against the global resource house.

According to BHP, “The impairment follows the bi-annual review of the Company’s asset values and reflects changes to price assumptions, discount rates and development plans which have more than offset substantial productivity improvements.”

“The impairment will reduce Onshore US net operating assets to approximately US$16 billion.”

This figure includes a deferred tax liability of around US$4 billion.

In July last year the operator announced an impairment of US$2.8 billion on the same assets, writing down value to around US$24 billion at the time.

It is not known how this latest impairment will affect BHP’s formerly announced plans to invest US$1.5 billion into these assets, however their continued operation was based on an oil price of US$60 per barrel and gas price of US$3 per Mscf.

Despite this loss BHP is still behind a massive increase in offshore gas activity in WA. 

Along with its joint venture partners Woodside, BP, Chevron, Shell, and Japan Australia LNG, it is bringing more than $2,.75 billion worth of investment into the industry following the greenlighting of phase two of the Greater Western Flank Project.

BHP will address the latest impairment in its US energy division by cutting the number of operating rigs in its Onshore US operations from seven to five in the March quarter.

“This will comprise three rigs in the Black Hawk and two rigs in the Permian. Beyond this, investment and development plans for the remainder of the 2016 financial year are under review, with a focus on preserving cash flow,” BHP said.

“Oil and gas markets have been significantly weaker than the industry expected. We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the Onshore US business from 26 a year ago to five by the end of the current quarter,” BHP CEO Andrew Mackenzie added.

“While we have made significant progress, the dramatic fall in prices has led to the disappointing write down announced today. However, we remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery.”