MELBOURNE Global miner BHP Billiton said on Friday it will write down the value its U.S. shale assets by $7.2 billion on a bleak outlook for oil and gas prices, cementing expectations it will be forced to cut its dividend for the first time in over 25 years.
Investors have argued that BHP should abandon its policy of holding or increasing its dividend at every result, as it is having to rely on debt to fund the payout following a rout in commodity prices and steep fall in profits.
"Simply put, the company can't afford to maintain its dividend policy without taking the balance sheet into territory that would be incredibly uncomfortable for a company of its nature," said Ben Lyons, a portfolio manager at ATI Asset Management.
Analysts said the charge on the U.S. shale assets, which takes total writedowns on the business to $12.8 billion pre-tax in less than four years, would hurt the metrics that ratings agencies use to assess the company, which on top of plunging prices for its products, would force a dividend cut.
"At this stage, the market would like to see them protecting the balance sheet by cutting both the dividend and their not-immediate capital requirements," said Rohan Walsh, a portfolio manager at Karara Capital.
The so-called progressive dividend policy has been in place ever since BHP merged with Billiton in 2001, aimed at offering stability through the ups and downs of the commodities cycle. It was maintained even in August after profits hit a decade low.
Moody's and Standard & Poor's have both flagged the progressive dividend as a potential risk to BHP's credit rating, with Moody's having warned it may cut BHP's A1 rating by March.
"We view the dividend as one of the levers they can pull to try to mitigate the impact on its financial profile," Moody's analyst Matthew Moore said on Friday.
The hefty impairment in U.S. shale, which will be about $4.9 billion post-tax, adds to BHP's recent woes following a fatal dam collapse in Brazil and tumbling prices for iron ore, which contributed about 60 percent of operating earnings last year.
The charge means BHP has wiped out nearly two-thirds of what it has spent on the business, which it entered with two acquisitions worth $20.6 billion in 2011, when oil and gas prices were much higher.
"Oil and gas markets have been significantly weaker than the industry expected," BHP Chief Executive Andrew Mackenzie said in a statement.
The company has sharply cut its operating costs and capital spending at its U.S. onshore operations since the collapse in oil prices, reducing the number of rigs from 26 a year ago to five in the current quarter.
BHP said it has cut its oil price assumptions for the short to medium term and lowered its medium and long-term gas price assumptions. That, along with delayed development plans, has led to the writedowns that will take the carrying value of the business to about $12 billion.
The writedown came as no surprise to the market, as oil companies large and small have been writing down the value of shale assets over the past 20 months since prices started crashing. Investors expect more impairments, as they value BHP's shale assets well below $12 billion.
BHP's shares, which sank to a 10-1/2 year low this week, jumped 1.5 percent on Friday, but trailed gains in other miners in what is seen as an oversold market.
(Additional reporting by Terry Wade in Houston; Reporting by Sonali Paul; Editing by Richard Pullin)