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BHP’s Texas shale expected to reap greater recovery rate

It has been revealed that BHP Billiton (ASX: BHP) could recognise an extra US$1 billion in cash flow than previously expected from its US onshore shale assets, which can largely be attributed to an enormous jump in the amount of oil that could be recovered from its Texas ground.

Last week, US player Devon Energy entered a US$6 billion deal with BHP’s partner GeoSouthern Energy to acquire its 50% stake in the Eagle Ford project, describing it as a “premier acreage position in the very best part of the play, truly the best of the best”, adding that it was a “high-margin, high-growth area”.

As reported by The Australian, however, Devon has also revealed that it is expecting recovery rates of 20% of the oil in the shale, compared to last year’s industry average of just 7%. A recovery rate of 20% would be the highest in the US and would suggest that BHP’s stake in the project is performing far better than the miner is letting on. The comments also came after BHP told journalists in November 2012 that it hoped to increase recovery rates from the average 7% to beyond 10%.

Furthermore, Devon’s target cashflow of US$800 million in 2015 has greatly exceeded Deutsche Bank analyst Paul Young’s estimate by 67%, suggesting that consensus earnings and cashflow upgrades are likely to occur.

However, Devon’s comments appear to be very ambitious, considering “exceptional cases” reaped recovery rates as high as 10%. BHP’s CEO Andrew Mackenzie will host a Texas investor tour of the company’s US onshore assets in just a fortnight, where an update on the project’s outlook will be given. Whilst it could have been a tour that aimed to lift expectations and hope for the project, Devon’s comments could result in disappointment if BHP’s outlook is not so optimistic.

Foolish takeaway

As has been the case with others in the industry, including Rio Tinto (ASX: RIO), Fortescue (ASX: FMG), Mount Gibson Iron (ASX: MGX) or BC Iron (ASX: BCI), shares in BHP have climbed in recent months as confidence returns to the mining sector while strong demand continues from China. However, the sector remains volatile and investors should consider the risks before buying shares.

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

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