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When playing the natural resource development game, BHP Billiton (LSE:BLT) is like a Grand Master who has earned a special bonus. In a world when the company is virtually unbeatable on even ground, the horizontally-integrated giant plays chess with a different set of rules. If controlling the board is the object of the game (last time I checked, it was), BHP is so well structured and skilled that it is like allowing them five moves for each move by the opponent.
Playing the Oil/Natural Gas Gambit
The Philippine
BHP has been making moves announced in the past several days in the Philippines and the Gulf of Mexico.
Filipino Engery Under-Secretariat Jose Layung Jr. has announced that BHP has committed to conducting drilling in a major natural gas field offshore of northwest Palawan. The development of the SC55 Service Contract is fast becoming a necessity as the production at Malampaya project, that currently supplies 45% of Luzon’s power generation requirements, is expected to start declining in 2015. The license for that project expires in 2024
Covering 9,000 square kilometers, SC55 has reserves only slightly less than the 2.7 trillion cubic feet in the Malampaya project.
BHP holds a 60% interest in SC55.
The Gulf of Mexico
It was announced late yesterday that BHP, already a major presence in the Gulf of Mexico, is in negotiations to acquire a significant stake in projects currently under the control of Petrobras, a Brazilian state-owned oil company. Petrobras is in the process of divesting in projects in the Gulf, Japan, and Africa as part of a drive to raise $15 billion to pay for obligations in Brazil itself where it has tapped into “some of the world’s most promising offshore oil fields.
Petrobras has valued its off-shore US assets at $8 billion. The company does not plan to divest completely, so the BHP bid would be for a yet-to-be-determined portion of the whole. Negotiations will like be complicated as Petrobras has stakes in more than 100 exploration blocks in the US Gulf. However, the depth of some of the resources has been beyond a reach that its partners have been unwilling to risk.
Countering With Copper
With other commodities suffering setbacks, BHP is setting up the board to make a play by positioning copper for some major moves. There had been some speculation that BHP would make an Australian move in connection with the Olympic Dam Project. Regarding that move as too costly, BHP has opted to move forward using the power of its existing assets in the US and South America. BHP’s strategy is driven by a trading price of $3.75 per pound versus a cash cost of production at roughly $1.60 per pound, and a declining supply worldwide. The company expects the law of supply and demand to move prices even higher.
It’s possible that BHP is banking on having a corner on the copper supply in the eventuality that copper goes into what CEO Alberto Calderon called “scarcity pricing” when demand far outstrips supply.
The Coking Coal Conundrum
In setting up the board for success, BHP has cut back production in its coking coal production in Australia. It appears that the pricing of coking coal is becoming increasingly volatile. In fact, so much so that spot pricing is actually lower than contract pricing at the present. BHP may be focusing on things more promising and stable.
BHP shares were down 1.29% this morning to 1918.00, still a healthy 100.00p above its 90 day moving average.
