Concern over BHP’s shale prospects

A recent US$2.1 billion write down by Royal Dutch Shell has left the local market wondering whether a similar move could be made by BHP Billiton (ASX: BHP) in the near future, after having spent US$20 billion on acquisitions in 2011 at what is now regarded to have been the peak of the market.

According to The Australian Financial Review, Shell blamed poor drilling results for the write-down, saying that the results revealed that some acreage was less productive than what was initially expected. Their write-down represented less than 10% of the total value of the asset, which was worth US$28 billion at the end of 2012.

Considering BHP accounted for a US$2.84 billion write-down last year for their 2011 acquisitions, many investors closely following the miner’s petroleum business regard it as a low chance that the company will follow suite with Shell. After all, BHP’s acreage on Texas’ Eagle Ford area is considered the “sweet spot” for shale in the region.

However, there are now doubts that the miner will be able to reach its production target of around 100,000 boe (barrel of oil equivalent) per day of production by 2018. Meanwhile, the company is still trying to discover the most effective way of extracting the best results from the Permian, where the geology is considered to be more complex than other regions.

Another element working against the company’s returns is the diminished US gas prices, which have fallen to around US$3.30 per thousand cubic feet, and are much lower than when BHP entered the shale market, meaning that larger supplies must be maintained to meet profitability targets.

Foolish takeaway

BHP will release its full-year results on Tuesday next week, and investors will await updates from the company regarding its future prospects on various projects, including the shale projects. This will include the capex budget for the US onshore petroleum for the financial year, which is expected to be significantly lower than the US$4.8 billion budgeted for the year just gone.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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