BHP takes $2.8 billion writedown

With lower gas prices predicted over the next decade, are there more writedowns to come?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 3, 2012 11:26 am AEST

BHP Billiton Limited (ASX: BHP) has announced that it will write down the carrying value of its shale gas assets acquired from Chesapeake Energy in February 2011 by US$2.8 billion.

Of course, the shale gas writedowns will be no surprise to our Foolish readers – we've been saying for weeks now that an impairment was in the offing.

BHP acquired the Chesapeake assets for US$4.75 billion. The writedown more than halves the value of the assets, and as I noted in this article, BHP could face further writedowns on that business. The company has blamed a short term fall in gas prices for the writedown. Natural gas prices in the US have halved since BHP made the Chesapeake acquisition, and although they have recovered somewhat in the last six months, they are yet to attain their previous highs.

Having completed a comprehensive review of the shale gas assets acquired when the company bought Petrohawk Energy Corporation for US$15.1 billion in August 2011, BHP has concluded that the value of those assets aren't affected, and still expects them to create substantial long term shareholder value.

The company also announced that it was writing down the value of its Australian Nickel West assets by US$450 million. Nickel West comprises several nickel mines, a smelter and refinery in Western Australia. Prices for the commodity have fallen significantly since last year, and almost caused the demise of Mirabela Nickel Limited (ASX: MBN). The company's share price has crashed by 86% over the last 12 months.

BHP's CEO Marius Kloppers announced that both he and Petroleum CEO Mike Yeager did not want to be considered for a bonus in the 2012 financial year. Mr Kloppers has come under fire for his performance at the big mining giant over the last five years, with the missed merger with Rio Tinto Limited (ASX: RIO), and delayed projects amongst issues causing investors to lose confidence. The writedowns certainly won't help his prospects, and are likely to increase the pressure on BHP's board to look for a replacement.

Time will tell whether the low natural gas prices in the US are a short-term problem or a longer-term phenomenon, but as it stands today, the Chesapeake purchase certainly looks badly timed and significantly overpriced. A report by the US Energy Information Administration has suggested gas prices are likely to stay low for more than a decade, which is probably not a good sign for the Petrohawk acquisition either.

Here at home, gas prices have remained reasonably high, which should be good news for the likes of Woodside Petroleum Limited (ASX: WPL), however the company is facing its own problems with protestors, blocking access to its James Price Point planned gas hub.

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Motley Fool writer/analyst Mike King owns shares in BHP and Woodside. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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