BHP Billiton Down 8% After $7 Billion Write Down...Is It All Bad?

• BHP Billiton Limited (ADR) BHP shares have declined 53.76 percent over the past year, almost touching their 52-week low on January 13 at $20.38.
• Two out of three analysts have maintained a positive view on the company.
• The company has announced that it would take on a $4.9 billion post-tax and $7.2 billion pre-tax impairment charge on its U.S. Onshore business.

Related Link: BHP Billiton Plummets After U.S. Asset Review, Notes 'Oil And Gas Markets Have Been Significantly Weaker Than The Industry Expected'

Guidance for Lower Capex

Paul McTaggart of Credit Suisse has maintained an Outperform rating on the company, with a price target of A$20.

McTaggart mentioned that the impairment charge was not unexpected, given “the sharp decline in gas/oil prices and the high book value.”

The total pre-tax book value was $21 billion in June, split between BHP Billiton’s various shale plays. Post-tax, McTaggart values the shale business at $11 billion.

“BHP noted the impairment was a function of 1) O&G prices and 2) Increased discount rate. The higher discount rate is attributed to the US Fed Reserve tightening and also increased volatility,” the Credit Suisse report stated.

The company is in the process of revising its capex plans for its shale plays, intending to reduce drill rigs from seven to five by the end of the March quarter.

“The impact of the lower rig count is US Onshore prodn down 3MMBoe to 110MMBoe in FY16 and down 7MMBoe in FY17 to 98MMBoe,” McTaggart explained.

Post-tax free cash flow is expected to increase by US$172 million to US$362 million in FY16 and by $76 million to $1.042 million in FY17.

The company has guided to FY16 and FY17 capex of $8 billion and $7 billion, respectively, although McTaggart expects BHP Billiton to further reduce capex, as well as further impairments and provisions for the incident and clean up at Samarco.

Lowering Onshore Drill Rigs

Citi's Clarke Wilkins has maintained a Buy rating on the company, with a price target of A$18.

While mentioning that the impairment charge did not come as a surprise, Wilkins explained that it was driven by “the fall in Henry Hub gas and oil prices as well as BHP lowering medium and long-term gas prices.”

Explaining that the “cut in drill rigs is consistent with these lower capex numbers,” Wilkins estimated that BHP Billiton’s US Onshore would generate cash worth almost US$0.5 billion in FY17, “after burning ~US$0.2b in FY16 and US$0.9b in FY15.”

However, the capex cut would lead to production decline from 110mmboe to 103mmboe in FY16.

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Production To Decline

Duncan Simmonds of Bank of America Merrill Lynch has maintained a Neutral rating on the company, with a price target of A$20.50.

Simmonds believes that the recent decisions regarding the impairment charge, reduction in drill rigs, and the company’s investment and development plans being reviewed for cost reduction, all make sense.

“What’s more important is the implications of lower production past FY16, where at current forward prices all but the highest quality Black Hawk acreage looks uneconomic in our view,” Simmonds said.

The U.S. Onshore production estimate has been reduced by 7Mmboe for FY17, given that the lower rig count would put pressure on production.

“Already, we expect gas production to wane, but now liquids production is likely to fall as well. From our previous FY17 total group production estimate of 244mmboe, we now reset our forecasts to 237mmboe, essentially flat vs FY16,” Simmonds added.

The company is currently focused on exploration, in an attempt to replenish the much needed reserves for BHP Billiton’s conventional portfolio, although M&A also remains a viable option.