Last week, the world’s largest listed diversified miner, BHP Billiton announced that it will take a $4.9 billion post-tax, $7.2 billion pre-tax, exceptional impairment against its US onshore hydrocarbon assets. After this write-down, the value of these assets will fall to $12 billion after a deferred tax liability, down from $21 billion pre-tax in June.

In addition to the impairment, BHP has cut the number of US onshore rigs it is operating from 7 to 5 (down from 10 mid-2015). The impact of the lower rig count will reduce the group’s onshore US production to 110MMboe for 2016 (down 3MMboe) and 98MMboe for 2017.

Citigroup estimates that these moves will save the company around $100 million in capex during 2016. US onshore capex is now set to fall to $1.3 billion for FY 2016, and then again to $1.1 billion for FY 2017. And based on these figures, Citigroup believes that BHP’s US onshore operations to generate cash of almost $500 million for FY 2017, after burning $200 million in FY 2016 and $900 million. However, these figures assume higher oil prices by 2017. At spot, onshore assets would have a cash burn of $100 million in FY 2017.

Low oil prices have forced BHP to take these drastic actions. Unfortunately, the consensus among Wall Street analysts is that this is just the beginning of a multi-year crisis for the miner.

If 2015 Was Terrible For The Mining Sector, 2016 Could Be The Dagger

BHP: Facing a perfect storm

The company is facing a ‘perfect storm’ of events. Built around a ‘four pillars’ strategy, BHP produces four key commodities, copper, oil, coal and iron ore. By using this approach, it was assumed that BHP would always be able to find growth somewhere. Management also assumed it unlikely that all four commodity prices would fall to record lows at the same time. Over the past year, these assumptions clearly haven’t held, and now BHP’s diversification strategy lies in ruins.