Interesting article from today's Sydney Morning Herald.August 4, 2012
By Malcolm Maiden
Yesterday's statement is intended to send a clear signal that the board still backs Kloppers.
ON A really uncharitable interpretation, BHP Billiton chairman Jac Nasser damned Marius Kloppers with faint praise yesterday.
Nasser said that the group's decision to invest in US shale was the right one, and that BHP's chief executive and his petroleum division boss, Mike Yeager, were doing the right thing in shifting their shale development effort to liquids that take the oil price rather than the ravaged US domestic gas price. BHP was ''fortunate to have Marius' leadership'' and the management team he led, he added.
Nasser also said, however, that BHP's $US2.84 billion US shale write-down was ''very disappointing'' and said the board agreed that Kloppers and Yeager should hand back their June 30 year short-term bonuses. He also stopped short of stating flatly that there were no plans to quickly bring the curtain down on the Kloppers era.
That was a considered omission, however. The view was that it was impossible to reject suggestions that Kloppers had lost favour without simultaneously raising them. Yesterday's statement is intended to send a clear signal that the board still backs Kloppers and his team.
Yesterday's write-down is nevertheless also a confession. Kloppers can point to the relative outperformance of BHP's share price in the past year, but he made a mistake with the first leg of his US shale invasion, the $US4.6 billion acquisition of Fayetteville, Arkansas, shale gas assets in February last year.
The Fayetteville leases are gas-only and already extensively developed. They were fully exposed to the US domestic gas price, and BHP is one of more than a dozen oil and gas majors who have bought into US shale with plans to use their financial strength to rapidly increase production.
The US gas price had fallen from $US14 per thousand cubic feet in 2005 to $US3.88 per thousand cubic feet in February last year when BHP bought its Fayetteville leases. It had edged up to $US4.27 per thousand cubic feet by July when it paid $US15 billion for listed US shale company Petrohawk - but by April this year was below $2 and at a 10-year low in the face of over-supply and a warm US winter that undermined demand.
It has bounced back above $US3 since, but gas futures are about $US1.50 lower than they were when BHP first bought in, and it is that slide that has generated the $US2.84 billion write-down of Fayetteville's carrying value.
The leases that BHP subsequently picked up with its $US15 billion takeover of Petrohawk are less extensively developed, and capable of producing both gas and liquids that take the oil price instead of the gas price.
As the gas price weakened, Kloppers and Yeager pulled drilling rigs off the Fayetteville leases, and put them to work on Petrohawk leases that are less heavily developed, and liquid-heavy. By 2015, Petrohawk's liquids production will account for about 50 per cent of total shale production, and about 80 per cent of revenue - and it is the re-weighting towards liquids that has shielded Petrohawk from the write-down Fayetteville has taken.
Details of the write-down were put before the risk and audit committee of BHP's board on Thursday, and BHP's board signed off on it yesterday morning. The decision to immediately announce the hit rather than wait until August 22 when the group posts its June year profit result reflects heightened awareness on all boards this year that continuous disclosure means just that, continuous disclosure.
BHP is dual-listed in Australia and Britain, and the Australian market's continuous disclosure regime is toughest.
''We've seen a couple of companies here get involved in continuous disclosure issues - it's fair to say that the level of awareness of continuous disclosure issues has been elevated,'' Kloppers said yesterday. He did not name names, but Leighton's payment of a $300,000 fine for tardy disclosure would have been in mind.
MARIO Draghi didn't come out on Thursday night and single-handledly solve the European sovereign debt crisis, and share and bond markets plunged in response, but traders were actually discounting their own unrealistic expectations.
The European Central Bank president was never going to follow up his comment a week ago that ''whatever it takes'' to defend the euro would be done by doing everything in a single day, and the ECB can't do it alone.
Draghi's idea is that the ECB will buy Spanish and Italian bonds in the secondary market at the same time as the European Union commits bail-out fund money to primary bond purchases, in return for expanded fiscal powers in both countries. It potentially creates enough buying power to head off a selling attack, making bond market intervention itself unnecessary.
His hint that bonds the ECB bought would rank equally with ones held by private sector investors was also important, because private holders will sell into ECB buying and undermine its effectiveness if they risk being relegated to second-rank creditors behind the central bank.
Germany needs to back increased financial assistance, and Italy and Spain need to agree to cede control over their economies in return for bail-outs. But all that would happen quickly if Europe's crisis flared and in that respect Draghi has outlined a plan. It will take longer to turn it into action, but it's a positive development.
Disclosure: I am long BHP.