BHP Billiton: The Oil Company That is Not an Oil Company

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Is BHP Billiton (ASX: BHP) a serious oil player? Or, let’s put it this way. Does the fact that oil touched US$127 in futures trading contribute to BHP Billiton’s earnings and its war chest for its pursuit of Rio Tinto (ASX: RIO)? BHP thinks the answer is yes.

BHP Billitons’s oil projects showed up in a research report we reviewed yesterday. The report tried to answer the question of where future global oil production would come from. There is a 32 million barrel per day gap between what the world produces today (about 87mbdp) and where the International Energy Agency reckons the world will be in 2030 (117mbpd).

In other words, the world needs another OPEC if oil supply is going to keep up with demand. OPEC currently produces 32mbpd. The IEA says OPEC can double that figure if it invests about US$2.4 trillion in exploration and production. OPEC is not as sure. As you can see, the gab between global production capacity and global consumption is, ahem, pretty tiny right now.

Chart: http://www.dailyreckoning.com.au/images/20080514DRC.gif
Source: BHP Billiton, IEA

According to BHP’s oil man Mike Yeager, BHP’s cost of production for a barrel of oil is between $6 and $12 a barrel. For the last three years, production at BHP’s various oil fields has hovered around 300k bpd. That makes it the world’s 25th largest oil producer, according to the company, which is not bad if your main business is mining.

It’s an axiom that the mining business and the oil business don’t mix. Energy exploration and production sucks up the capital, while project life is uncertain and cash flows variable. There are lot of known unknowns, and on the exploration side, some unknown unknowns.

But BHP Billiton does know that oil production increased to 378k per day last month, and 415k per day last week. It knows that the fifth LNG train from the North West Shelf is scheduled to begin production this year. It knows that its Neptune field in the Gulf of Mexico, though delayed this week, should begin cranking out 50kbpd in June of this year.

It also knows that by this time next year the Shenzi field in the Gulf of Mexico should begin producing about 100kbpd and that by 2010 the Pyrenees field in Western Australia should produce about 96kbpd. And there are more projects in LNG on the way, too.

That is a lot of good news for an oil company that’s not an oil company. By market value alone, BHP Billiton is bigger than BP (NYSE: BP) and not far behind Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A). If the company is valued as an energy company and not just a miner, then yet another reconsideration of its value may take place. Rio Tinto should be worried about that. All that energy translate into cash for a bid sweetener.

BHP Billitons’s cost of production is going to rise. There is huge cost inflation across the entire oil industry as projects move further off-shore and deeper underwater. But this is an example of Australia’s exposure to straight-forward bull markets in energy and resources. The businesses aren’t easy, but they are not conceptually complicated.

What’s so astonishing about Australia’s resource economy right now is how it’s filtering down from gold and oil to base metals, bulk commodities, and even lead. “The great minerals land grab by China Inc continues with Hunan Nonferrous Metals Corp looking to buy one of Australia’s best untapped lead deposits,” reports Kevin Andrusiak in today’s Australian.

Lead?

“Yesterday Hunan launched a takeover bid for Perth-based Abra Mining, saying it is prepared to spend just $67.3 million to control one of the nation’s best untapped lead deposits. Hunan, which has received the backing of the Abra board for the takeover play, has offered 83c for 70 per cent of the remaining Abra scrip it does not already own.”

Hunan’s offer puts a 44% premium on Abra shares. A 44% premium on lead. If lead gets that kind of premium, what would BHP’s oil and energy reserves (1.3boe) and its resource base (3.5boe) command? The resource grab is well and truly on, and it’s moving at the speed of lead.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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