BHP Billiton (NYSE: BHP) Shale Investments

Brian Hicks

Written By Brian Hicks

Posted August 8, 2013

BHP Billiton Ltd. (NYSE: BHP) is already the world’s largest mining company, but what you probably didn’t know is that you will most likely be seeing the comapny pop up more and more in the coming years as it looks to expand its portfolio in the shale oil and gas industry while maintaining a diverse mining culture.

The Melbourne, Australia company plans to be in the thick of things, as forecasts predict global commodity demand will shoot up an astounding 75 percent in the next 15 years.

Barnett Shale Natural GasAustralian miners like BHP are already well positioned for global success, and with the company’s new chief executive officer, Andrew Mackenzie, BHP is prepared to seize every opportunity and looks to be among the world leaders in multiple facets.

It has already started happening. In 2011, BHP spent $20 billion on shale assets in the U.S., putting it right up there with Exxon Mobil Corp. (NYSE: XOM) and China Petrochemical Corp. (NYSE: SNP), Asia’s largest oil refiner.

But with those lofty expectations, you’ve got to measure the bumps along the way.

Some of the big boys, including BG Group (LSE: BG), Shell (NYSE: RDS-A), and BHP, have had to acknowledge impairments in their U.S. shale assets.

Writedowns made by BHP and these others indicate that they may have been a little more than fashionably late to the party, paying more for lower quality and underexplored assets in shale acreage.

Even in places like the Bakken, there are ups and downs in the quality of shale reserves.

When improved drilling technology burst onto the scene and the shale boom took off, it essentially created a bubble between the years of 2007 and 2011. There was a mad rush to secure shale assets, and some companies were playing catch up.

This is where BHP wound up.


But all is not lost, not by a long shot. Sure, BHP may have overpaid for its U.S. shale assets, and it may cost the company a little more in the long run to explore and develop its reserves, but with a little extra elbow grease, it’s still going to pay off in the end.

What BHP has been doing, aside from its work in the U.S., is looking north to Canada for potash projects – various mined and manufactured salts that contain potassium in a water-soluble form. Potash is largely used for the manufacturing of fertilizers.

The Jansen potash project, a 3 billion-metric-ton resource, would be a $16 billion undertaking.

Why the company hasn’t decided on the go ahead may have a bit to do with Russia’s Uralkali OAO (OTC: URALL), the biggest potash producer, which just quit its most recent venture on July 30 on signs that global prices will fall by as much as 25 percent.

That was only a little over a week ago, so those plans are up in the air right now. It very well could mean it gets shoved in a drawer and forgotten for a while.

But BHP is undeterred. Saskatchewan also shows promise with some great bodies of ore that will be explored and further BHP’s diversity plan.


A lot of the commodities growth will come from – you guessed it – China. It’s already the biggest consumer of metals and energy in the world, and it will only grow in demand as its population rises.

Asian markets as a whole will look to Australia, the home of BHP, for much of their liquefied natural gas (LNG), driving Australian projects to the tune of $180 billion in the future, according to Bloomberg. As that happens, Australia will overtake Qatar and become the world’s largest exporter of LNG by the end of the decade.

China has slowed in growth recently, but it comes as no surprise – the country is smoothing out imbalance in its economic condition and transitioning into a more export-driven nation, relying on more domestic consumption.

Despite the slow growth and transition happening now, China’s demand for commodities is still on the rise, and there is no question about its population growth. It’s going to demand BHP’s resources more and more as time goes on.


With all this being said, I’m going to step out on a limb and say this is probably a low point for BHP. Overall, its stock has dropped 21 percent this year.

If you’re looking at BHP, you’re definitely going to have to exercise some patience.

But China’s not going anywhere. It’s straightening itself out as we speak; demand will grow, and the nation will more efficiently use resources that BHP can provide.

The company’s U.S. shale assets are still relatively new, and decisions are yet to be made on ore and potash projects in Canada.

The value of the Australian dollar is going to play into BHP’s hands, as well. It will help, since a large number of its operations are in Australia. The company will be paying Australian costs and seeing revenues in U.S. dollars.

Other big miners like Rio Tinto (NYSE: RIO) are following a similar path as BHP, set to benefit from future demand.

August 20, BHP will report its earnings, but I wouldn’t read too much into it. China, who accounts for 30 percent of BHP’s sales, only grew 7.9 percent last year, its slowest economic growth since 2008.

This is definitely one where we’ll have to wait and see. The big payoffs will be found down the line.


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