BHP prepares to slash and burn

The BHP Q4 production is out and was unremarkable in volume terms, a littler short of expectations:

  • Group production increased by 9% during the December 2014 half year with records achieved for eight operations and five commodities. Production guidance remains unchanged and we are on track to deliver Group production growth of 16% over the two years to the end of the 2015 financial year.
  • Metallurgical coal production increased by 21% to 26 Mt in the December 2014 half year as Queensland Coal and Illawarra Coal both achieved record half year volumes.
  • Western Australia Iron Ore production increased by 15% to a record of 124 Mt (100% basis) in the December 2014 half year as the ramp-up of Jimblebar continued and we improved the availability, utilisation and rate of our integrated supply chain.
  • Petroleum production increased by 9% to a record 131 MMboe in the December 2014 half year supported by a 71% increase in Onshore US liquids volumes to 24.4 MMboe.
  • Copper production(1) decreased by 2% to 813 kt as strong underlying operating performance across the business was offset by lower grades at Antamina.
  • Record manganese ore and alumina production was underpinned by strong performances at both Hotazel and the Alumar refinery.

BHP Billiton Chief Executive Officer, Andrew Mackenzie, said: “Our operational performance over the last six months has been strong. We are reducing costs and improving both operating and capital productivity across the Group faster than originally planned. These improvements will help mitigate some of the impact of lower commodity prices and we remain alert to opportunities to further increase free cash flow.

“In Petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our Onshore US business by approximately 40 per cent by the end of this financial year. The revised drilling program will benefit from significant improvements in drilling and completions efficiency. Our ongoing shale investment program will remain focused on our liquids-rich Black Hawk acreage. However, we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production.

“We continue to believe that our planned demerger will help support further improvements in operating performance in both the core BHP Billiton and South32 assets. Within BHP Billiton, it would allow us to identify and deploy best practice across our assets more quickly and simplify our organisation to reduce overheads. We are making good progress towards securing the approvals we require to put the proposal to a shareholder vote in May and remain on track to complete the process before the end of the financial year.”

In short, ready yourself for the great slash and burn.

 

David Llewellyn-Smith
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Comments

  1. Here is where the low oil price will probably claim the scalp of even an essentially mining company such as BHP.
    To reduce by 40% (the drilling rigs on hire) is slash in anyone’s language, and the burn will take effect when the negative revenue from oil operations massively exceeds the meager revenue from coal and iron ore.
    You have heard the term cash-burn, this will be a cash bush-fire. Shareholders bail now! WW

    • Nah, anything in the 20 – 26 range is good long term buying imo. Oil price is being deflated more by financial instruments rather than the actual demand and supply dynamics imo. BHP can ride out oil prices this low into perpetuity i reckon.

      Hard times though. IO margins down, traditional conventional oil margins in the Gulf down. Perhaps another write down on shale assets?

    • Here is something I prepared earlier:
      During FY 2013, 15 oil companies wrote down the carrying value of their light tight oil (LTO) assets by a total of US$35 billion, including BHP $2.84 bn, ENCANA $1.7bn, EXXON $2 bn, BP $2.1 bn, Devon $2 bn, Chesapeake $3.3 bn and Shell $2 bn. Those impairments happened in a ~US$100/bbl oil price environment. So if the major oil players in the US LTO experiment could not make money in a US$100 per barrel market, we must expect massive asset write down action when results for the 30 December ’14 period are released next month. These asset re-sets will be accompanied by a scramble to refinance from the mid and junior players, with many companies likely to hit the wall as they breach debt covenants, further weakening the industry’s ability to supply oil.
      The EIA calculates that US LTO production now runs at around 5.4 mmbbls per day and total oil output, including from the GoM and other conventional oilfields, runs at around 9.2 mmbbls per day. However production from underlying legacy LTO wells declines by around 330,000 BOPD on a month on month basis. Allowing for some moderation of decline rates over time, if no new wells were drilled and completed, total US LTO output would decline by about 3.5 mmbbls per day over a year. Only the addition of around 433,000 BOPD of new supply each month has supported recent US LTO production growth of 103,000 BOPD per month.
      An ongoing collapse of the US drilling effort will soon lead to a decline in LTO production. Conservatively, if the development effort is halved (BHP has flagged an initial 40% cut), and it could fall much more, US oil production is likely to be falling by over 115,000 bbls per day per month by June ’15, which could see total US oil production fall by 1.4 mmBOPD by mid 2016, taking the USA’s total production back to 7.9 mmBOPD, a fall of 1.4 mmBOPD from peak levels.

      Peter Strachan

    • Having worked for them it was obvious that getting rid of people would deliver massive efficiency benefits. Its not just the direct cost of employing these extra people, its they fact that a large number of them are either doing jobs which slow or prevent other people from doing theirs. There are CBD and site offices full of ‘managers’ and other paper shufflers who are a net drag on the business.

      I’ve mentioned it several times before but the buyer of ravensthorpe nickel operate it with 25% of the staff that BHP did… That is the scale of the problem they have.

      • How about the HBI plant, they pulled that down so no one could show them up there. Their move into oil will be the final straw.WW

      • It’s not just BHP. It’s fairly endemic in alot of the miners. RIO is the same. My cousin has been working as an electrician on BHP and RIO sites for the last 6 or so years. To paraphrase he reckons you would not believe the number of useless people who do absolutely nothing, but get paid 150-200k doing so.

      • “Their move into oil will be the final straw”

        Wouldn’t say they moved into oil, more like unconventional shale oil. They have always had high margin conventional assets in the gulf. These still make good money even at current prices. As for the shale exposure they already wrote down billions of it and the exposure is not a company killer.

      • A lot of shufflers employed for compliance as a result of the fallout from the GFC bwanker behavior. As long as they’re Australians being employed all good.

  2. I’m wondering what BHP’s operation report will look like when IO crashes to $20 per dry metric tonne.