DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE”

by Steve St. Angelo, SRSRocco Report: As the U.S. and Global Oil and Gas Industry continues to cannibalize itself to stay alive, the Shale Dominoes begin to fall as a BHP Chairman announced its shale investment was a MISTAKE. Yes, it’s true, BHP Chairman Jacques Nassar said his company’s $20 billion shale investment six years ago, in hindsight, was a mistake.

According to the article, A $20 billion mistake: BHP Billiton chairman laments huge deal in US shale:

BHP entered the shale business at the height of the fracking boom in 2011 and invested billions more developing the operations. The fall in oil prices since then has led to pre-tax writedowns of about $13 billion on the business. Activist shareholder and hedge fund Elliott Management, holding 4.1 percent of BHP’s London-listed shares, has been trying to gain support from other shareholders to persuade BHP to sell the shale oil and gas business.

“If you had to turn the clock back, and if we knew what we knew today, we wouldn’t do it, of course we wouldn’t do it, but go back and put yourself in our position at that time,” Nasser told a business seminar, referring to the shale purchase.

“We bought exactly what we thought we were buying, but the timing was way off.”

While BHP Chairman Nassar stated that “the timing was way off” in its shale investment purchases, I really don’t think it was prudent “AT ANY TIME” to invest in shale oil and gas. BHP Billiton is making the case that they knew exactly what they were getting into, but they paid too much for their shale investments.

As the article states, BHP Billiton has written off $13 billion of their shale oil and gas investments. Assuming they purchased $20 billion in shale energy assets, they have written off 65% of their investment. This is a big deal because BHP Billiton is the second largest mining company in the world.

I was writing back at the time of BHP Billiton’s shale purchases that the company was making a BIG ERROR in judgement. However, with the oil price above $100 a barrel from 2011 to 2014, the market believed that shale was going to be the next best thing since sliced bread. Unfortunately, the U.S. shale oil and gas industry has been a dismal failure…. that is, if we consider it as a financial venture.

As I have posted in several articles, here is a table of the top U.S. shale oil and gas producers operating cash flow surplus-deficits since 2005:

Again, you will notice that up until 2008, the industry enjoyed an operating cash SURPLUS. However, since 2009, the top U.S. shale oil and gas producers have suffered an operating cash DEFICIT… and it even was worse from 2011-2014, when the oil price was over $100. So, it really didn’t matter WHEN BHP Billiton purchased its shale energy assets…. they were going to be LOSERS, regardless.

Now, if we go back to 2011, when BHP Billiton started purchasing its shale energy assets, we can clearly see how overly optimistic and wrong they were about the industry. In the Financial Times article, BHP in $4.7bn US shale gas assets deal:

BHP Billiton has moved to bulk up its energy holdings, entering the US shale market with a deal to buy Chesapeake Energy’s Arkansas-based gas business for $4.75bn.

The Anglo-Australian miner said on Monday that it would buy 487,000 acres of leasehold gas properties in the Fayetteville shale, funding the deal from its existing cash balances.

The assets, which currently produce about 400m cubic feet of gas per day, will increase BHP’s oil and gas reserves from current levels by about 45 per cent. The company sees potential to triple the production from the Fayetteville acreage during its 40-year operating lifetime.

BHP Billiton purchased Cheasapeake Energy’s Fayetteville Shale Gas assets in Arkansas for nearly $5 billion with the hopes of tripling its production over the 40-year operating lifetime. I find this quite amusing because most shale gas fields will peak within 5-8 years:

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