Global miner BHP Billiton may be forced to cut its dividend for the first time in over 25 years. Some analysts believe that the company can’t afford to maintain its dividend policy without taking its balance sheet into uncomfortable territory. Moody’s and Standard & Poor’s have both flagged the progressive dividend as a potential risk to BHP’s credit rating.
The company announced on Friday that it will write down the value its U.S. shale assets by $7.2 billion. The hefty impairment in U.S. shale will be about $4.9-billion post-tax. The charge means BHP has wiped out nearly two-thirds of what it has spent on the business. The company entered the market with two acquisitions worth $20.6 billion in 2011, when oil and gas prices were much higher.
Investors have argued that BHP should abandon its policy of holding or increasing its dividend at every result. The progressive dividend policy has been in place ever since BHP merged with Billiton in 2001. The dividend plan was aimed at offering stability through the ups and downs of the commodities cycle. It was maintained even when profits hit a decade low in August.
The company is facing a bleak outlook for oil and gas prices like many others in the energy sector. The oil and gas markets have been significantly weaker than the industry expected. The company has sharply cut its operating costs and capital spending at its U.S. onshore operations since the collapse in oil prices. BHP reports that it has reduced the number of rigs from 26 a year ago to five in the current quarter.
The writedown came as no surprise to the market, as oil companies large and small have been writing down the value of shale assets in the 20 months since prices started crashing. Investors expect more impairments to come in the future. The charge on the U.S. shale assets takes total writedowns on the business to $12.8-billion pre-tax in less than four years. Analysts say that the write down would hurt the metrics that ratings agencies use to assess the company and, combined with plunging prices for its products, would force a dividend cut.