Given the option between shale and iron ore, BHP sticks with iron ore.
BHP announced today it will cut its capital and exploration expenditure to $9 billion in 2016 from $12.6 billion this year. That's down from a $10.8 billion previous forecast and as much as $23 billion in FY2013.
What's interesting is that the fall in spending comes mostly from stalling an iron ore port project at in Western Australia (widely expected) but also cutting shale spending.
What's generally left intact is the core of the iron ore business, despite the rout in prices. Oil prices have also fallen but other companies are continuing to invest in shale.
Why?
- BHP could be fighting to maintain market share in iron ore with Rio Tinto
- BHP knows something about the economics of shale that pure shale companies don't (or are refusing to acknowledge)
- BHP just isn't a very good shale driller
Evidence of #3 is that BHP was already cutting shale capex in 2014 before the price rout.
The other options have more-important takeaways. If they continue to invest in Australia at these rates, that's not quite the investment bust many were worried about and it could keep a line under the Aussie.
But if shale is really a bad investment, and dumb money elsewhere is continuing to invest, that sounds like the recipe for another oil price crash followed by a rout in shale companies (and their junk-rated debt).
