Earnings Preview: BHP Billiton

| About: BHP Billiton (BHP)

Analysts will soon receive information on the status of BHP Billiton (NYSE:BHP) after the company announces their quarterly earnings in the coming days. Expectations from analysts are currently low, with a push that the company draw down projects and leave the diamond business.

Other items of focus were the company's purchase of Petrohawk Energy, a shale natural gas company that totaled $12.1 billion. Petrohawk has access to three major shale formations in the US from Eagle Ford, Haynesville and Permian Basin areas in Texas and Louisiana. The company also took to acquiring some assets from Chesapeake energy. Since the purchase, natural gas prices have tumbled 40 percent.

The move of course came as no surprise as Royal Dutch Shell (RDS) has also sought to extend its reach within the shale operator business. The company has bid £1.12bn on Mozambique explorer Cove Energy, and disclosed that the transaction, were it to take place, would yield £124m in taxes.

The company recently faced criticism as it announced that the Fayetteville assets would be written down, when the company reduced the value of an asset, a $3.3 billion reduction; the company was acquired for $17 billion last year. To make the news easier to digest, the CEO Marius Kloppers and head of petroleum Mike Yeager declined their annual bonus. The company attributed the write down to a decline in shale gas assets.

But as the August 22nd earnings call draws closer, analysts continue to worry that more company assets will be written down. The move would not be outside of the industry, which already has seen Rio Tinto (NYSE:RIO) slash $8.9 billion from its aluminum business, which followed their disastrous purchase of Alcan.

Considering the price of aluminum, the possibility of a BHP write down seems imminent, with some analysts tossing numbers like a billion dollars. The BHP aluminum business is estimated to be a $4.75 billion asset.

The company is also warning that market conditions have worsened in China. As demand for coal has declined the company is expecting to begin a round of layoffs in Australian mines. China, in the past, has imported millions of tons of iron, coal, copper, and other precious metals. As the Chinese economy begins to slow down from its rapid growth, word is not clear which jobs will be cut from Australian mines, or if the unionized workforce should be concerned.

Australia itself happens to be one of the largest coal mining hot spots to do business in, cost wise, pairing up against Russian and Chinese interests; comparatively speaking, Indonesia and South Africa are much cheaper. With a strengthening Australian dollar and higher labor costs, the country is starting to no longer have as much value as a mining operation. Employee costs can average as high as $100 thousand annually, a larger sum when compared with Indonesia, Columbia, or South Africa. Thermal producer Xstrata (XTA) also cut a portion of its contractors.

To make matters worse, in Australia the government has outlined plans to tax the energy company in an effort some critics may find looks like a capital heist. The tax outlined seeks to capture $13.4 billion in revenue.

On to iron ore, the company recently inked a deal in Pilbara with the Nyiyaparli people for a land agreement. The agreement would lead to an expansion of mine operations of 350 million tons by 2020 from the current 120 tons. BHP will provide $2 billion for the Pilbara and the Nyiyaparli people for over 40 years in exchange for 70,000 square kilometers of valuable land, leading to the opening of 40 iron ore mines.

With all the excitement building up to the earnings call, one can't help but wonder what will be discussed, and if the company can beat expectations or disappoint further as commodity prices fall.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Industrial Metals & Minerals, Australia, Earnings
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