BHP Billiton's $US80 billion ($76bn) plans to build a giant US shale gas business are looking less attractive after a continued slump in North American gas futures brought widespread cuts to price and earnings forecasts.
Since November 14, when BHP petroleum boss Michael Yeager fronted investors to explain $US20bn worth of acquisitions, an oversupply of US shale gas has sliced another 36 per cent off the already-depressed price of front-month US natural gas futures.
Not only have near-term prices slumped to a
10-year low of $US2.30 per thousand cubic feet ($US2.17 a gigajoule) but futures prices out to 2020, which Mr Yeager used in November to ease concerns, have fallen.
They are now sitting below the $US6 analysts have been told is roughly what is needed for BHP to get a decent return on its investment.
Last week, UBS analyst Glyn Lawcock wiped $US1.1bn off his combined BHP earnings forecasts for this financial year and next because of slumping US gas prices.
BHP reported an 86 per cent rise in profit to $US23.6bn last financial year, but analysts do not expect it to match this in 2011-12.
In December, when prices were one-third higher than they are now, Deutsche Bank forecast a fall in gas prices, and the bank's analyst, Paul Young, sliced $US4.5bn, or 20 per cent, off his $US24.3bn valuation of the onshore shale gas business.
While the drop has knocked around earnings forecasts, the jury will be out on the shale acquisition for a while yet.
"If prices can pick up and the volumes do what they anticipate, it has a reasonable level of cashflow," BT Financial fund manager Tim Barker said.
"In retrospect, perhaps the acquisition was a little bit early but it is one of these acquisitions that it will take two or three years before we can look back and say it was good or bad," Mr Barker said.
Analysts and futures traders are still expecting US gas prices to rise, but not as quickly as they had been, meaning some profit that had been expected from the shale gas is no longer being factored in.
Despite the slump in shorter-term prices, long-term prices are still expected to head to $US5 or $US6, which Deutsche says is about the long-term cost of replacing reserves.
The potential kickers to prices are an expected tightening of greenhouse gas legislation in the
US to promote gas-fired power and the growing likelihood that the once gas-short US will start liquefied natural gas exports in the next decade.
The fact that LNG exports are even being considered shows how quickly shale-gas technology has turned US gas markets on their head.
As recently as six years ago, LNG import terminals were being considered and gas prices had
spiked as high as $US15/Mcf.
Last year, BHP jumped into shale gas in a big way, surprising many when it first paid $US4.75bn for Chesapeake Energy's ground in Arkansas and followed this up with a $US15bn takeover of Texas and Louisiana focused Petrohawk Energy.
The big miner also plans to spend about $US60bn in the next decade increasing production to more than 1 million barrels of oil a day, or four times what it is now.
The company's massive expansion plans do not help the current price situation either. BHP is still making decent cashflow at current prices because of the high amount of petroleum liquids, which fetch oil prices.
TXN Price at posting:
60.0¢ Sentiment: ST Buy Disclosure: Held
