Tuesday, August 22, 2017

BHP To Sell Its US Shale -- Focused In The Eagle Ford, Permian -- August 22, 2017

Bubble: it's been a recurrent theme on the blog -- $60,000/acre in the Permian might have been a tad expensive. Today we learn that Australia mining giant BHP Billiton's full-year profit soared 450% but still missed estimates. It will triple its "final" dividend (43 cents at the end of the year, vs 14 cents one year ago). But here's the biggest news: BHP will sell its shale assets. The company is being pressured to spin off its US oil and gas operations. BHP spent $20 billion in 2011 on US shale oil and gas assets ... and we know how that worked out. I see the headline -- "maybe BHP Billiton's $20 billion fracking bet wasn't a blunder after all" -- Forbes, June 3, 2014 -- let's see who wrote that and why: Christopher Helman --
In 2011, the Australian mining giant BHP Billiton made a surprise entry to the North American shale game by spending $20 billion to snap up some 1.5 million acres.
It bought Petrohawk Energy for $15 billion (including assumed debt) to get at its primo positions in the Eagle Ford, Permian basin and Haynesville shale. And it shelled out $4.75 billion to Chesapeake Energy for its interest in the Fayetteville shale.
The move was met with surprise by BHP investors, who had only just gotten accustomed to their company's forays into deepwater drilling in the Gulf of Mexico. The company had never "fracked" a single well.
"Our skill set was clearly offshore deepwater," says Rod Skaufel, president of shale operations for BHP Billiton Petroleum. "The first year was tough."
Costs were too high, because BHP didn't yet know what it was doing. Then natural gas prices plunged to lows not seen in a decade. Suddenly this big acquisition began to look like a big folly.
$20 billion / 1.5 million acres = $13,000 / acre.

Where were the rigs?
  • focus of their efforts was clearly the Eagle Ford
  • of 25 US rigs, 17 of them were in the Eagle Ford
  • next most exciting: the Permian; BHP has 450,000 acres in the Permian
  • then "gassy" Haynesville (Louisiana) -- but even in 2014, the Hyanesville remains a dud
  • had partnered with Helmerich & Payne and Schlumberger
  • BHP said it was drilling Eagle Ford wells for $4 million / well -- 2014
Break, break. $4 million / well? Here's the rest of the story:
[The CEO] says BHP is now drilling its Eagle Ford wells for $4 million a piece.
Often when you hear oil companies talk about the costs of drilling wells, they lump together the drilling and the completion parts into one big number. BHP doesn't see it that way. He prefers to separate the raw drilling of the well from the process of completing (i.e. fracking) the well. It's the quality of the completions that makes all the difference.
And so we move on. If you want to buy some mineral acres in the Eagle Ford, opportunity may soon knock on your door.

From the blog, July 15, 2011:

Back To The Bakken

Active rigs:

Active Rigs523276193184

RBN Energy: FERC is back; what does it mean?

Libya? How important is Libya to the price of oil? Just a reminder: Libya has halted "loadings" from its biggest oil field (militants  again, I'm shocked, I'm shocked). That was announced yesterday; a force majeure. Change in the price of oil? Flat. 


  1. "BHP said it was drilling Eagle Ford wells for $4 million / well -- 2014"

    That's quite a slight of hand, considering that 60% of D&C cost is completion cost.


    1. Yes, I was aghast that BHP would think that way; more aghast it would market its story that way; but absolutely incredulous that a Forbes contributor would fall for that.

      The bad news: my hunch is that BHP is not the only one thinking that way. Reading between the lines of the transcripts of earnings calls of other operators suggest many are thinking the same way -- especially when it comes to DUCs. They've already sunk the CAPEX into drilling and now they look at those DUCs in a different light.

      I'm probably inappropriately rationalizing this but it seems it's one thing to think this way when buying shale assets in the first place, and thinking this way after oil prices plummet. If that makes sense.

    2. According to the EIA, WTI averaged $94.88 in 2011. Henry Hub natural gas spot price averaged $4.00/mmbtu in 2011.

      Yesterday WTI closed at $47.47 and Henry Hub closed at $2.96.

      The value of BHP's leasehold in the Eagle Ford depends on where it's located, whether it's in the dry gas window, the wet gas "condensate" window or the oil window.

      Likewise, the value of its leasehold in the Permian depends on if the acreage is in the core area of the play or the non-core area.

      It will be interesting to see what price the BHP assets fetch. If they're acreage is in the wrong places, BHP will take a bath.

    3. You are so correct. What's worse, even before considering location, location, location, the whole oil / gas sector, seems to me, is a buyer's market.