BHP Billiton Ends Rocky Fiscal Year with Massive Capital Spending Cuts, Banks on Offshore Drilling

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Researched by Industrial Info Resources (Sugar Land, Texas)--BHP Billion plc (NYSE:BHP) (Melbourne, Australia), the world's top mining firm by market value, suffered a series of crushing setbacks in its fiscal year ended June 30, including the worst mining disaster in Brazil's history. BHP Billiton recorded its worst fiscal-year loss since it was formed in a merger between BHP Limited and Billiton plc in 2001. (According to UBS analysts, it's likely the biggest loss for BHP since it was formed in 1851.) Industrial Info is tracking $14.92 billion in projects involving BHP Billiton.

The company saw a net loss of $6.39 billion, compared with net profits of $8.67 billion for fiscal 2015; as recently as 2011, annual profits topped $20 billion. Capital expenditures for the year totaled $6.95 billion, far lower than fiscal-year 2015's $11.95 billion. For the 2017 and 2018 fiscal years, capital expenditures are expected to total $4.6 billion and $5.4 billion, respectively.

The company was hammered on all sides by problems that were cyclical and exceptional, market-driven and disaster-related. The most predictable were the weak commodity prices, including oil, gas, iron ore and coal, which sent underlying profits spiraling down to $1.2 billion, an 81% drop from the same period last year. But that doesn't include $7.7 billion in write-downs and charges, a large chunk of which was related to a catastrophic dam failure in November at Brazil's Samarco iron ore mine, which is co-owned by BHP and Vale S.A. (NYSE:VALE) (Rio de Janeiro, Brazil). The disaster killed 19 people and caused irreparable harm to farm land and affected nearby towns, preventing residents from reaching their own homes.

The catastrophe also put on hold two planned maintenance programs for crusher plants at the Samarco iron-ore mine, each valued at $1 million. It is uncertain when normal maintenance at the two plants will resume. For more information, including affected capacity and environmental and equipment requirements, see Industrial Info's project reports on crusher plants No. 1 and No. 2.

The sting from the commodity-price collapse was especially bad in North America, where BHP Billiton is heavily invested in oil and natural-gas markets. The persistent price weaknesses in this area, particularly shale gas, accounted for $4.9 billion of the $7.7 billion in write-downs and charges. (The Samarco disaster accounted for $2.2 billion.)

But BHP Billiton executives pointed to one bright spot in North America for potential growth: deepwater oil drilling. "We are accelerating our counter-cyclical exploration program, and plan to invest approximately $800 million in exploration in the 2017 financial year," representatives of BHP Billiton said in a quarterly earnings press release. "In Petroleum [segment], exploration drilling has commenced in Trinidad and Tobago and in the Gulf of Mexico, following positive results at Shenzi North during the 2016 financial year."

Indeed, the company's $350 million Shenzi Field offshore drilling program is moving smoothly. BHP Billiton is drilling four infill wells to increase production 15% and extend the life of its investment in the field. The project kicked off in April, and is expected to be completed toward the middle of next year. For more information, including schedules, required components and contractor contact information, see Industrial Info's project report.

Work also is coming along on the company's largest North American project: the $2.6 billion, Phase I construction of a potash mine and mill in Jansen, Saskatchewan. The three-phase project, which totals roughly $16 billion in investment value, currently is projected to produce 8 million tons per year of compacted granulated potash; the first phase is designed to produce 4 million tons per year. Although the entire project is not expected to wrap up until fourth-quarter 2022 at the earliest, executives reported significant recent progress on the excavation and lining of the production and service shafts, as well as the installation of essential surface infrastructure and utilities. For more information, see Industrial Info's project report.

"Over the past five years we have actively reshaped our portfolio, and we are confident we have the right mix of commodities, assets and opportunities to create substantial value over time," said Andrew Mackenzie, chief executive officer of BHP Billiton, in the press release. "While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper."

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