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Fracking hell: BHP Billiton takes $7bn hit

The commodities giant takes a massive impairment on its fracking assets, but refuses to cut its dividend.

by Adam Gale
Last Updated: 15 Jan 2016

It's not so many years that investing a few billion in the swanky new technology of fracking must have seemed like a great idea. Sure, blowing a high-pressure cocktail of water, sand and chemicals at an awkward angle deep into barely accessible, dense subterranean rock formations isn’t exactly a cheap way of getting oil, but at over $100 (£69) a barrel who cares? Now that crude’s dipping below $30, presumably BHP Billiton does.

The commodities giant just announced a $7.2bn pre-tax impairment on the substantial portfolio of onshore American shale oil rigs it developed from 2011 onwards. These are now valued at approximately $16bn. It follows the company having to revise its price assumptions for oil and gas downwards again, as the price war between Saudi-led OPEC and frackers like BHP rages on.

The sheikhs’ strategy of pumping at full pace to depress the price and drive the frackers out of the market appears to be paying off – even if it means the Saudi royals may have to sell off a chunk of Aramco to pay for it. BHP has already reduced the number of its fracking rigs in operation from 26 a year ago to seven today. That number will have fallen to five within the next few months.

The Saudis may take heart at that, but then again BHP's oil output isn't projected to fall by more than 10% this year, and those fracking rigs haven’t actually been scrapped, just shelved. As BHP chief executive Andrew Mackenzie said, ‘we are well positioned to respond to a recovery’. The pendulum will eventually swing back again once prices rise.

That may be slim consolation to BHP investors, who have seen the share price slip 7% this morning to 611.3p, which means the firm is now worth less than 30% of what it was in mid-2014. For a long time it was seen as one of the most secure commodities companies precisely because it had diversified from its industrial base into the energy sector, but over the last year both have been hit. Brent crude may have lost over 70% of its value in the last 18 months or so, but the collapse in iron ore has been just as bad.

In the year to last June, BHP’s attributable profits fell 86% to $1.9bn as a result, and they will have taken a further hit since as prices have continued to drop. Mackenzie may rightly ‘remain confident in the long-term outlook’ of the business, but as long-term could easily mean five or six years, that’s not really very helpful right now.

What would probably be more helpful would be suspending the dividend. Unlike rivals Glencore and Anglo-American, which have also taken huge impairments, BHP is still paying its shareholders handsomely. In its 2014-15 financial year, it dished out $6.6bn – 2% more than the previous year and well over twice its profit after tax. It would take quite the optimist to believe this could go on forever.

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