BHP Tipped To Cut US Shale Spend To Shore Up Dividend Promise



Reuters

MELBOURNE, Jan 19 (Reuters) - BHP Billiton Ltd may be forced to slash its planned $4 billion spending this year on U.S. shale wells and book writedowns on its shale assets as it battles plunging prices for its biggest earners iron ore, oil and copper.

The mining giant, which has cut capital spending for the past two years, needs further savings to have enough cash to meet a promise not to reduce its dividend, analysts and investors said, with some tipping it could slice its U.S. onshore drilling budget in half.

The spending cuts could come as soon as Wednesday, when BHP will release its December quarter operational review.

U.S. onshore drilling, the biggest single item in the company's capital budget, is seen as the easiest target after a 41 percent plunge oil prices, 16 percent drop in iron ore prices and 12 percent drop in copper prices over the past three months.

Other candidates for cuts in its $14.2 billion capital and exploration spending plan could be its longer-dated projects like BHP's Canadian Jansen potash project and Australian Olympic Dam copper expansion study.

"When you are pushed up against the wall you have to make some difficult decisions, so all those things are possibilities. Commodity prices are falling very quickly, very sharply," said Richard Knights, an analyst at London-based investment bank Liberum.

Shale drilling is much easier to shut than conventional oil and gas wells as individual wells are smaller, making it a logical target for cuts. It is not expected to cut spending on its conventional wells in the Gulf of Mexico.

Writedowns on the shale assets, which BHP acquired in 2011 for $17 billion when gas prices were much higher, are also inevitable, analysts and investors said, based on a much weaker outlook for forward prices.

BHP declined to comment on Monday on the possibility of expenditure cuts or the outlook for it shale business.

The Anglo Australian giant's attributable profit in the year to June 2015 is forecast to slide 23 percent to $10.7 billion, according to Thomson Reuters I/B/E/S.

As of June 30, 2014, the company valued its onshore U.S. business at $26.95 billion, after taking a $2.8 billion writedown on some of its shale gas assets in 2012.

Cuts To Clear Decks

"There's severe pressure for them to cut capex on the onshore business. Once they come clean with that, the market will be in a better position to assess its value," said Michael Evans, an analyst at CIMB in Sydney, who said BHP could halve shale spending to $2 billion.

Deutsche Bank analyst Paul Young estimates the company will cut U.S. onshore capital spending to $2.7 billion, cutting rigs in the Permian and Black Hawk basins and driving down production volumes in 2016 and 2017.

Investors, who a year ago were holding out for BHP to return excess cash through a share buyback, no longer expect a near-term capital return and even see a threat to its policy of paying a steady or higher dividend every six months if commodity prices stay where they are.

"If earnings fall, your payout ratio comes into play at some point in time. You can't have a progressive dividend forever," said Jason Beddow, chief executive of Argo Investments, whose stake in BHP has dropped from the fund's third-largest to fifth-largest holding since June.

(Additional reporting by Silvia Antonioli in LONDON; Editing by Richard Pullin)



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