One of the most interesting aspects of the BHP result was the management comments about the company’s shale gas investments. Questions are being asked about their long term value. RBS has this to say:
Shale gas investments under review At the investor briefing, BHP management stated its capex program for the US onshore (shale gas) business was under review. The company is no longer committing to its previous targets of spending US$80bn over 5 years, including US$20bn at its US onshore business, stating this will depend on market conditions. At current gas prices, we believe the US onshore business is cash flow negative (spot US$2.48/mcf). While far from ideal, we were encouraged to hear management’s willingness to adjust the strategy, to reduce capex and focus more on the liquids rich wells. Its still too early to judge the success of the shale gas acquisitions, however it appears these projects face an uphill battle from an economic returns perspective.
The scale of the ramp up of US shale gas and LNG production is changing global energy dynamics. The US will likely even start exporting gas, and its reliance on the Middle East has been sharply reduced — something that will have an enormous impact on geopolitics in the region, of course. Shale gas and shale oil are having a dramatic impact — and the world’s biggest reserves are in China.
Deutsche is saying this:
The rise of shale gas production has seen a structural change in the US gas market. In the early 2000s, the US was short gas, driving high pricing and necessitating LNG imports to meet demand. However the market is now oversupplied, depressing pricing and driving proposals to export gas in the form of LNG. US LNG exports offer benefits to buyers: lower cost supply, diversity of supply, and potentially greater flexibility. However approval to export from the US DOE is critical given the political importance placed on energy security within the United States. We believe exports of US LNG will occur, but expect a moratorium may be placed on export volumes at some point, essentially capping the risk to proposed Australian LNG projects.
Without being too specific, that is an enormous shift in the dynamics of global energy supply.
RBS has a buy on BHP and a target price of $43.76. Deutsche also has a buy and a price target of $53.40.