Should You Buy BHP Billiton plc After $7.2bn Shale Writedown?

The bad news just keeps pouring in for beleaguered BHP Billiton (LSE: BLT) shareholders.

In November the firm faced a tragedy at Brazilian firm Samarco‘s iron ore operation in Minas Gerais, after a tailings dam failure led to serious flooding and a number of deaths. BHP has a 50% interest in Samarco and in addition to the human cost, the catastrophe triggered a price slide for the firm’s already battered shares.

And now, in response to a plummeting oil price that has seen Brent Crude crashing through the $30 level to sell at $29.70 a barrel today, BHP has been forced to write down the value of its US shale assets by $7.2bn (approximately £5bn).

The writedown, which will be carried in the company’s interim results for the six months to December 2015 as an exceptional item, sees the value of BHP’s US shale investments down by nearly two thirds now. But chief executive Andrew Mackenzie did try to put a brave face on things, saying: “However, we remain confident in the long-term outlook and the quality of our acreage. We are well positioned to respond to a recovery“.

Price slump

Despite Mr Mackenzie’s longer-term optimism, the markets reacted pretty much as expected and knocked 48p (7.3%) off the share price to 609p approaching midday.

The question is, have BHP Billiton shares finally reached rock bottom and is it time to buy now? Of course, we don’t need to pick the very bottom to benefit from a recovery opportunity and it can be foolhardy to try to time investments with that kind of accuracy.

But I do think the best time to buy is usually around the time of maximum pessimism, so could there be worse to come? Well, there actually could be. With Iran lining itself up to start selling oil again, we really could see the price fall even further. We also still don’t know how deep the Chinese slowdown is going to get and with little sign of the deep structural reforms that the country’s economy so desperately needs, I reckon the gloom there is going to go on for a while yet.

Dodgy dividends?

Before the upturn comes, I can see BHP Billiton having to slash its currently unsustainable dividend levels. Forecasts suggest a whopping yield of 9.8% for the year to June 2016, but that would amount to around two-and-a-quarter times earnings. And though Andrew Mackenzie pointed out today that the firm has been “dramatically cutting [its] operating and capital costs“, it really would seem like madness to me to be shelling out that amount of cash in dividends.

Having said that, before the latest news the City’s analysts were fairly bullish on BHP Billiton. I do think it’s a solid company for the long term and it really should benefit once a recovery gets under way. But I reckon there will be worse to come before it gets better.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.