Company Profile – BHP Billiton is the world’s largest diversified resources company. Key businesses are coal (Coking and Thermal), base metals, iron ore, aluminium, stainless steel and petroleum. BHP’s strategy focuses on building, acquiring and expanding tier one assets across its diversified commodity suite. Tier 1 assets are long life, low cost and expandable. BHP has got operations in Australia, United States, Africa, Asia and South America. BHP generally operates through customer sector groups (CSG’s). BHP is headquartered in Melbourne and employs more than 45000 people. The group recorded revenue of more than $65, 968 Million in FY2013.

Analysis – BHP is projecting 15% compounded annual growth rate for its onshore US shale gas business out to FY18, making it an increasingly important sector for the group. Capital expenditure of US$4 billion per annum is expected be relatively consistent over this period, ultimately at between 25% and 30% of the total capital expenditure. Shale gas basins do not have uniform geology, which means the economics of each well in the basin is different. It makes commercial sense that the gas companies are currently focussed on sweet spots and will ultimately move to the lower returning wells as long as they meet the required return on capital – effectively high grading the resources.


Onshore US Shale Areas  Source - Company Reports


Having a closer look at BHP’s onshore petroleum assets consist of interests in 1.5 Million acres ( net of joint venture interests) of gas extraction permits over four key basins – the eagle ford, the Permian, the Fayetteville and the Haynesville. The Eagle ford is split into two key areas – The Hawkville and the Black Hawk.


As at October 2013, 13 rigs were focused on the Black Hawk, 7 on the Hawkville, 2 in the Permian, 4 in the Haynesville and none in Fayetteville. Total rig count has fallen from a peak of high 40’s in May 2012 to mid-20’s currently. Production over that period has increased as more wells are operating and drilling times have reduced by an estimated 30-35% over the past 12 months.


Unlike the Fayetteville and Haynesville, the eagle ford contains valuable Natural Gas Liquids as well as natural gas, making the basin more lucrative in a low gas price environment. The Permian basin is also considered liquids rich but is at a much earlier stage of development than the eagle ford and the two rigs operating there are currently considered appraisal rigs by the company.
BHP has outlined a budget of US$4 billion per annum over the medium term, which it expects to support a compounded annual growth rate of 15 % in the onshore shale gas business to FY18.


Source - Thomson Reuters

Price				Price % Change
Close:	36.31 (28-Jan-2014)			3M:	(0.83%)
52 Wk High:	39.34 (20-Feb-2013)			6M:	6.65%
52 Wk Low:	30.43 (25-Jun-2013)			1Y:	(0.32%)

The proportion of liquids versus gas the company produces is based largely on what basin it drills and the particular geological endowment of that basin. It is not impacted by drilling technique or operational factors per se. Crude and condensates are considered almost identical for the purpose of this analysis.
The new petroleum strategy of BHP aims to maximise cash flow and value by increasing liquids production in the eagle ford and Permian, delivering brownfields growth at Mad Dog and Scarborough, trading US onshore acreage (in the Permian), divesting non-core assets and discovering new large fields via an improved high impact global exploration program. Overall these steps would bring a highly positive effect on the future cash flow, the conventional growth options and exploration potential.
 
In regards to the conventional assets, we believe there would be more divestments, BHP will continue to simplify their conventional portfolio. The UK assets have been sold for less than US$ 250 Million with closure expected in 1Q14 and we think Algeria and Pakistan are next.


We believe that the production will be higher than the guidance. With the volumes recovering in Gulf of Mexico (Atlantis production doubling, Shenzi maintaining nameplate and mad dog recovering in FY15 along with new production from Macedon and North Rankin 2).
More projects are required to offset natural field decline, particularly in the Gulf of Mexico. The key growth projects are Mad Dog 2 and stampede in the Gulf of Mexico along with the Scarborough/Thebe and Tallaganda projects in Western Australia.


The exploration strategy has been given a refresh with only big reservoir systems being pursued. The key focus areas the Gulf of Mexico, Northern Brazil, Trinidad and Tobago and Western Australia. Reviewing the targets Pegleg at Trinidad and Tobago is huge and the Raptor discovery in the Gulf of Mexico could be big. We would like to highlight that BHP has not made a commercial conventional petroleum discovery in more than 5 years.

BHP (AUD, Millions)	2013	2012	2011	2010	2009
Total Revenue	65,968	72,226	71,739	52,798	50,211
Gross Profit	53,688	60,271	60,227	42,450	38,210
Total Operating Expense	46,743	48,474	39,923	32,767	38,051
Operating Income	19,225	23,752	31,816	20,031	12,160
Net Income After Taxes	11,075	15,532	23,946	13,009	6,338

The US Onshore Assets
The focus is on drilling out the Blackhawk over the next 4 years and focusing on the higher returning acreage in the Haynesville with 25 rigs, moving into development phase in the Permian in FY15, then moving rigs from the Blackhawk into either the Hawkville or Haynesville from FY16 onwards.
BHP has 19 rigs in the Eagle Ford, 14 are in the Black Hawk and 5 in the Hawkville. There are 10 rigs in the Karnes country. The best acreage is in Karnes as it is more in the oil window rather than the condensate window.BHP has seven central delivery points in the Eagle ford with the final and largest CDP now being constructed at a cost of US$ 250 Million.

The focus has narrowed even further in the Permian with the main activity now in the Southern Delaware. They are in the process of acquiring and consolidating their land holding in the Southern Delaware so we expect the core 100,000 acres to grow over time. The company remains committed to developing a 100 KBOE/d  (kilo barrel of oil equivalent per day)  field from around 100,000 acres in the southern Delaware. Production is currently running at 14 kboe/d with just 2 rigs, up from 4 kboe/d in April. A total of 65 wells were drilled during FY13 with 6 rigs so many of these wells are now producing.

Dividend
Yield	4.047501	FY
	2.97467	5yr Av
Payout Ratio	56.94189	FY
	39.550627	5yr Av

The long term BHP story remains one of production and earnings growth, both organically and through acquisitions. The US$15 Billion purchase of US tight oil Assets in 2011 demonstrated a focus on further diversification and the importance of energy in the portfolio. The company is embarking on a portfolio streamline process by divesting non-core assets and is also cutting costs. We are putting a buy on BHP at the current price of $36.31.

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