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BHP Billinton Writes Down US Shale Assets Worth $7.2 billion, No Surprise For The Investors

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January 17
9:06 PM 2016

BHP Billinton Ltd., Melbourne, Australia based commodity producer, has announced Friday for writing down the value of its onshore US energy assets roughly by $7.2 billion before tax. Sharper downtrend in global energy prices and bleak outlook has acted behind the decision. Moreover, there exists widespread rumor that it may also be forced to cut dividends for the first time in 25 years.

The impairment charge amounting around $7.2 billion in post tax represents downgraded forecast on prices and revisions to its own development plans. The write down will reduce the net value of its onshore US operating assets to about $16 billion, reports Marketwatch.

Investors suggest BHP to abandon its policy of holding or increasing dividend at every result. Their argument is based on the logic that the company needs to rely on debts to fund the payout following a riot in commodity prices and consequent steep fall of profit.

The resources firm also announces to cut the number of operating rigs to five from seven during the ongoing quarter. Furthermore, it has decided to review investment and development plans with a focus on preserving cash flow, for the remaining period of 2016. Significant weakening of the oil and gas markets have prompted the firm to adopt disappointing decision for writing down, reports The Wall Street Journal quoting Andrew Mackenzie, Chief Executive of BHP.

The hefty impairment in U.S. shale adds to BHP's recent woes following a fatal dam collapse in Brazil and tumbling prices for iron ore. Both the two factors have contributed for 60% of its operating earnings last year.

BHP has entered the market with two acquisitions worth $20.6 billion in 2011, when oil and gas prices remained much higher. The company has sharply cut its operating expenses and capital spending at its U.S. onshore operations since the collapse in oil prices. It has also decided to reduce the number of rigs from 26 a year ago to five in the current quarter.

However, Moody's and Standard & Poor's both have referred the dividend cutting as a potential risk to BHP's credit rating. Mood's has already warned of cutting BHP's A1 rating by March. Dividend is considered as one of the levers to mitigate impact on financial profile, Reuters furnishes the argument quoting Mathew Moore, an analyst for Moody's.

The write down announcement has caused no surprise to the market. Oil companies, large and small, have been writing down the value of shale assets over the past 20 months since prices started crashing. However, investors expect more impairments, as they value BHP's shale assets just below $12 billion.

BHP Billinton Ltd. has announced for writing down the value of its onshore US energy assets roughly by $7.2 billion before tax. BHP has entered the market with two acquisitions worth $20.6 billion in 2011, when oil and gas prices remained much higher. But with the upsetting downtrend in oil and gas markets, the Australian commodity producer has finally adopted the writing off phenomenon over shale assets worth around $12 billion.

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