As BHP Billiton Ltd. considers potential acquisitions and weighs as much as $5 billion in project spending, the company sees oil and gas markets rebounding faster than its mined commodities.
Recovering oil prices and efforts to lower costs are making investment opportunities more attractive, said the world’s biggest miner, which booked writedowns of $7.2 billion against its U.S. shale unit earlier this year.
The company said in a statement that decision on its investment in the BP Plc-operated Mad Dog 2 oil and gas project in the Gulf of Mexico would be taken within six months by Bottom of Form
BHP’s board. Its share of the project at $2.5 billion was earlier flagged by the company.
Steve Pastor, the producer’s petroleum operations president, said in the statement that additional investments of as much as $2.5 billion in existing project options are also being considered.
“While currently well supplied, underlying fundamentals suggest both oil and gas markets are improving more quickly than our minerals commodities. Petroleum is well placed to maintain its position as BHP Billiton’s highest margin business and to grow its free cash flow contribution,” Pastor said.
Macquarie Group Ltd. analysts wrote in a note Tuesday that compared with 54 percent an average margin for earnings before interest, taxes, depreciation and amortization from iron ore for BHP, the Melbourne-based company’s petroleum unit, with operations in countries including the U.S. to Australia, had made 64 percent over the past 15 years for the same figure.
With U.S. crude trading at three-month highs near $50 a barrel, and with prices poised for gains faster than metals and coal, since the Organization of Petroleum Exporting Countries agreed last week to cut production for the first time in eight years, oil has advanced about 10 percent.
BHP said Wednesday in presentation slides that with prices poised for gains faster than metals and coal, petroleum is leading a commodities rebound.
BHP said it expects oil prices to continue to recover. Pastor said that crude at a 13-year low of $27 a barrel in January wasn’t sustainable for the industry.
He said on a media call that the low prices “didn’t make a whole lot of sense and it wasn’t necessary to rush after volumes in a case like that.”
Pastor said in the statement that with prices below $50 a barrel, Mad Dog 2 is an economically attractive option.
“Ultimately, the challenge they have is on volumes. They don’t have any major projects, any high-margin projects, coming through until the next decade,” Sydney-based Deutsche Bank AG analyst Paul Young said before the presentation.
In July that BHP forecast that a second consecutive year, in the 12 months to June 30 the output from its petroleum unit will fall to between 200 million to 210 million barrels of oil equivalent.
Pastor said in the statement that new oil sources would have to account for a third of more than 100,000 barrels of liquids per day by 2025 demand due to population growth and rising incomes. He said that there’s a significant opportunity to make investments in growth due to the impact of investment deferrals, rising demand and projected field decline.
(Adapted from Bloomberg)
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