BHP Billiton Chief Executive Marius Kloppers will give up a bonus potentially worth millions of dollars after the world's biggest miner said it was taking $3.3-billion (U.S.) in writedowns due to plunging commodities prices.
BHP will take a $2.84-billion writedown on a recently-acquired U.S. shale gas business and a $450-million writedown on its Australian nickel business, the company said on Friday.
Mr. Kloppers is already under pressure from shareholders, including investment fund BlackRock, to pay bigger dividends or buy back more shares, which they say are being forsaken in favour of capital spending on new ventures.
The foray into U.S. shale gas followed several ill-fated attempts by BHP under Mr. Kloppers to beef up, most notably a plan to buy Rio Tinto before the global financial crisis and Canada's Potash Corp. in 2010.
BHP bought its Fayetteville and Petrohawk U.S. shale gas businesses in 2011, promoting the acquisitions as a way to leapfrog into a growing market for energy. Shale gas prices have roughly halved since the acquisition.
It paid $4.75-billion for Fayetteville and $12-billion plus $3-billion in debt for Petrohawk. The Petrohawk division was not affected by the writedown.
"This is not to say buying these assets was a bad thing," said Morningstar analyst Mark Taylor.
"Shale gas is the future, and these were a good way to get a foot on the best assets. It might have been an expensive way to do it.. You can't time the bottom of a price cycle to perfection," Mr. Taylor said.
The writedown was anticipated – BHP's shares slipped 2 per cent against a 1 per cent drop in the broader market – but was below some forecasts.
Citi in a July 27 research report said it was expecting shale gas writedowns of $3-billion to $5-billion, even before taking the plight of the nickel division into account.
BHP is not the only big producer taking a hit from U.S. gas.
BP Plc announced this week a $2.1-billion writedown of U.S. shale gas assets, while BG Group is taking a $1.3-billion impairment charge.
But Mr. Kloppers until recently had shrugged off concerns, predicting BHP would make up for weaker gas prices by focusing on output of liquids from shale wells.
Shale technology using underground "fracking" explosions and horizontal drilling is wringing gas from reserves previously thought unrecoverable, but it has become a victim of its own success as a glut develops in the United States.
Both BHP impairments will be recognised as exceptional items, the company said.
Chairman Jac Nasser said in a statement the shale gas writedown was "very disappointing" after low gas prices had cut the value of the Fayetteville business.
"The board remains of the view that the investment in the U.S. shale assets is the right decision for BHP Billiton shareholders," Mr. Nasser said, adding that both Mr. Kloppers and the head of petroleum, Mike Yeager, would not take their bonuses.
Mr. Kloppers in the 2011 fiscal year received a bonus of $2.35-million in cash and the equivalent amount in deferred shares after the company posted a record profit of $23.6-billion. The chief executive of Rio Tinto in 2011 also forfeited an annual bonus after the firm made an $8.9-billion writedown on Alcan aluminium assets bought under his watch.
As far back as mid May, BHP warned commodity markets would cool further while putting the brakes on a plan to spend $80-billion beefing up its businesses.
The Reuters-Jefferies CRB index, a closely followed indicator for commodities, is down more than 3 per cent from where it was at the start of 2012.
Mr. Kloppers this week told journalists BHP would focus on cutting costs, three weeks before it is expected to report its first drop in annual profits since the 2008 global financial crisis due to weakening commodity demand.
Before the writedowns, BHP was tipped to report on August 22 about a 22 per cent decline in underlying earnings for fiscal 2012 to just under $17-billion, based on analysts estimates.
U.S. natural gas prices plunged from a peak in 2011 near $5 per million British thermal units to a decade low of $1.90 earlier this year thanks to abundant supplies and weaker demand. Prices have since recovered to close to $3 per BTU.
Nickel, priced universally in U.S. dollars, peaked at just under $29,500 per tonne in 2011 and prices have largely been on a downward slope since. The London Metal Exchange three-month price stood at $15,350 on Friday.