BHP Billiton may cut $2.5b capex on oil price slump

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz
BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz
BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

BHP Billiton may cut $2.5 billion from it's capex budget. Photo: David Mariuz

The oil price crash is expected to force BHP Billiton to slash about $US2 billion (A$2.5 billion) from its capital spend in its onshore US petroleum business over the next four years, Deutsche Bank says.

The miner is expected to delay any increase in drilling rig numbers at its Permian Basin venture in Texas and to defer infrastructure investment.

Deutsche Bank mining analyst Paul Young says BHP's strategy of focusing its US onshore petroleum activities on oil and gas liquids has come under pressure from the fall in the price of benchmark crude oil prices to below $US65 a barrel.

BHP will now likely avoid adding to rig numbers in the Permian Basin in western Texas until West Texas Intermediate crude recovers to $US80 a barrel again – which Deutsche expects only in financial 2018.

The Permian Basin has long been seen as one of BHP's most exciting shale holdings. But a price of $US80 a barrel is need for any new Permian wells to generate an internal rate of return of 20 per cent, Mr Young said.

Most of the $US4 billion that BHP has earmarked this financial year for onshore US drilling and development will go on oil and gas liquids-rich areas, including on Permian shales.

But at current oil prices BHP's wells in the Permian are not clearing the cost of capital, while its wells at Black Hawk shale venture in the Eagle Ford region of southern Texas are only just clearing an internal rate of return of 20 per cent, Mr Young estimates.

Of 25 total rigs in operation in BHP's onshore US acreage, 17 of them are in the Eagle Ford.

Mr Young has also revised production guidance down for BHP's onshore petroleum division over the next four years on the back of pushing out investment in the Permian, where the miner has 450,000 acres. BHP's target export rate of 100,000 barrels of oil equivalent a day from the Permian will not be hit until 2020, he says.

Deutsche has downgraded its WTI forecasts to between $US71 and $US76 a barrel for the next three years, from a previous range of $US80 to $85 a barrel.

"We expect BHP to conserve their Permian acreage keeping their rig count in this field at four and delay infrastructure capex until the oil price increases to $US80 a barrel, which we expect only in financial 2018," Mr Young said.

"This is the price required for Permian wells to generate a 20 per cent IRR."

The delay will see BHP's capex spend for its US onshore division come in at about $US200 million a year less than previously budgeted for the next few years, and by up to $US700m from financial 2017 onward, under Deutsche's estimates.

He is tipping that BHP's onshore division will produce 134 million barrels of oil equivalent (mmboe) in the 2018 financial year, a drop on his previous estimate of 142 mmboe.

However, he noted BHP had the flexibility to accelerate its drilling program if oil prices were to recover.

This story BHP Billiton may cut $2.5b capex on oil price slump first appeared on The Sydney Morning Herald.