BHP Billiton Limited (ASX:BHP) has announced an impairment charge of approximately US$4.9 billion or A$7 billion after-tax on its onshore US assets.
The company will recognise the impairment charge under an exceptional item in the financial results for the half year ended 31 December 2015. The charge was recognised after BHP completed the bi-annual review of its asset values and reflects changes to price assumptions, discount rates and development plans which had more than offset substantial productivity improvements.
The latest write-down will reduce the company’s Onshore US net operating assets to approximately US$16 billion or A$22 billion. BHP blames the under-performance of its assets on significant volatility in the oil and gas industry. The company added that low US gas price levels are due to higher-than-expected supply at lower costs. Having already suspended the development of its dry gas acreage, the company has now further reduced its medium and long-term gas price assumptions.
Given that the oil price has fallen more than 30 percent over the last three months due to the disruption of OPEC and stronger than anticipated non-OPEC production, BHP has reduced its short to medium term oil price assumptions. The company however expects the prices to marginally lift from its current lows.
The increased volatility in oil and gas prices has compelled the company to increase the discount rates applied on the valuation of its onshore assets. Subsequently, BHP stated that it will reduce the number of rigs operated in its onshore business from seven to five in the March 2016 quarter. Further investment and development plans for the remainder of the 2016 financial year are currently under review as the company aims to preserve cash flow.
BHP Billiton’s Chief Executive Officer, Andrew Mackenzie commented on the company’s performance: “Oil and gas markets have been significantly weaker than the industry expected. We responded quickly by dramatically cutting our operating and capital costs, and reducing the number of operated rigs in the onshore US business from 26 a year ago to five by the end of the current quarter."
While BHP is currently trading at eleven year lows, investors have reacted positively to the announcement as the stock (as at 12:34 PM AEDT) has gained more than 2.4% since the market opened.
Author: Simon Herrmann
Jan 15, 2016
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.