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Oil Column: Eagle Ford shale to account for 15% of BHP Billiton’s cash flows

November 27 2013, 1:57pm
Oil Column: Eagle Ford shale to account for 15% of BHP Billiton’s cash flows

Oil production from America’s Eagle Ford shale should contribute more than 15% of mining giant BHP Billiton’s (LON:BLT) free cash flow over the next seven years, according to Deutsche Bank.

The German bank expects the large FTSE 100 constituent, best known for producing harder assets, is due to showcase its oil shale business next month, and it says that Devon Energy’s US$6bn move for Eagle Ford acreage points to an US$18.8bn valuation for the BHP unit.

Devon bought GeoSouthern Energy, BHP’s partner, and the deal has provided encouragement for BHP investors.  Some details published alongside the deal have also allowed observers, such as Deutsche, with valuable insight.

BHP first ventured into US shale with its acquisitions, of Chesapeake and Petrohawk, for about US$20bn, back in 2011, but the sizeable investment has at times appear ill-fated as the onshore energy revolution began to saturate America’s gas market and prices tumbled.

Indeed, last summer BHP had to write off US$2.8bn from the assets acquired from Chesapeake.

A subsequent switch of focus, emphasising oil rather than gas, has potentially turned the business unit’s prospects, according to Deutsche.

“BHP’s US Onshore strategy has changed significantly since the Petrohawk acquisition,” Deutsche analyst Anna Mulholland said in a note.

“The focus is now on drilling the liquids rich Black Hawk acreage and holding down leases in the other fields. BHP will showcase their Eagle Ford acreage for the first time in December. 

“Fortunately we now have a direct read through via DVN's US$6b acquisition of JV partner GeoSouthern. Production will likely be higher, capex lower and cash flow stronger from FY15 onwards.” 

The analyst reckons, in the face of higher than expected oil production, that prior forecasts now under-play the possible cash flows.

“We have always expected BHP’s Black Hawk and Hawkville acreage to be cash flow positive in FY15. However our US$1.3b forecast over the next 3 years appears conservative. Devon expects that the Black Hawk alone will generate US$800m of cash flow in 2015 and over US$2.5b through to 2017.”

Mulholland adds: “Devon expects a step-up in production from 53kboe/d in Q413 to 135-145kboe/d by 2017. This compares to our 130kboe/d estimate. 

“It will take 5 yrs to drill out BHPB’s 58,300 net acres in the Black Hawk (not 2 yrs as some believe), and 7 yrs to drill out the Hawkville. We expect BHP’s Eagle Ford production to peak at well over 250kboe/d next decade.”

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