Analysis of BHP's Fayetteville Shale Acquisition and Impairment Loss

This report provides an analysis of BHP's Fayetteville Shale acquisition, focusing on the recognition and measurement of impairment losses. It examines the factors affecting impairment loss measurement, including the company's diversified investment portfolio and the use of potentially flawed accounting methods. The report also evaluates the measurement of reserves, highlighting potential overestimations and early warnings from industry experts. Furthermore, it discusses the appropriate accounting treatment for the Fayetteville investment, emphasizing the allocation of impairment losses and the required disclosures in financial statements. This document is a student contribution and is available, along with other solved assignments and study tools, on Desklib.

Running head: BHP FAYATEVILLE SHALE ACQUISITION 1
BHP Fayetteville Shale Acquisition Report
Student’s name
Institution affiliation

BHP FAYATEVILLE SHALE ACQUISITION 2
BHP Fayetteville Shale Acquisition Report
Executive summary
The BHP group is situated in Melbourne, Australia and operates as combined enterprise
of the BHP Billiton Plc and the BHP Billiton Ltd groups. This was after the completed DLC
(dual listed company) merger in 2001, June. The two groups have each their corporate identity
separately and maintained their exchange listings of stock though they get managed and operated
as one single entity of unified economy. Their boards and senior management of executives
comprises of the same personnel. The BHP Billiton Plc has the LSE (London securities
exchange) as the key premium listing in UK and another secondary listing in South Africa as
Johannesburg stock exchange. The BHP Billiton Ltd operates a primary listing on the ASX
(Australian securities exchange) in Australia. Additionally, the ADRs (American depository
receipts) for the two BHP billiton groups trade on the NYSE (new york stock exchange) in the
US. By 2011, the group had an approximated market capitalization of US $232.9 billion. For the
final year 2011 the group reported an amount of US $ 30.1 billion in net operating cash flow as
its profit that was attributed to the US $ 23.7 billion for stakeholders and US$ 71.8 billion as
revenue. The group has more than 100,000 workers and contractors who work in not less than
100 international locations (Sun et al. 2018, p.3435). This means that the company could easily
acquire any oil field such as the Fayetteville.

BHP FAYATEVILLE SHALE ACQUISITION 3
Contents
BHP Fayetteville Shale Acquisition Report...................................................................................................2
Introduction.............................................................................................................................................4
Acquisition recognition and measurement..............................................................................................4
Factors affecting impairment loss measurement....................................................................................5
Measurement evaluation........................................................................................................................6
Fayetteville investment accounting treatment........................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

BHP FAYATEVILLE SHALE ACQUISITION 4
Introduction
Businesses come to know of impairment when their financial statement that carry the
amount from asset groups or long lived asset exceeds the fair value and cannot be recovered.
Any carrying amount becomes unrecoverable when it gets greater than undiscounted cash flow
sum that is expected from the use of the assets as well as the eventual disposal. FASB has
defined impairment loss to be the amount in which the value carrying exceeds the fair value of
the asset. CPAs should thus to check on every asset any entity owns after each of the reporting
periods. In this case, when circumstances undergo changes and indicate that the carrying amount
cannot be recovered, CPAs need to test the impairment for the asset (Spence, 2017, p. 387).
Acquisition recognition and measurement
By February of 2011, BHP announced that it was acquiring the Chesapeake energy
corporation’s oil reserves and interests for the Fayetteville natural oil and gas shale in the U.S.
This included the midstream system of pipeline for US $4.76 billion (American Association of
Petroleum Geologists, 2014, p. 30). The company expects to offer from the cash resources of the
group. The acquisition was consisted with the company’s strategy that involves invests on large,
low cost and long life assets which show a significant growth volume from the future
development. It is also supportive of the company’s diversification goal by customer, geography
and products. Thus the company became one of the largest operators of the Fayetteville oil
reserves and interests in the natural oil and gas field.
The Fayetteville shale assets in Chesapeake included an approximate of 487,000 acres of
property that involved leasehold as well as producing assets of natural gas property which were
located at the Arkansas in USA (Johnson, et al. 2018, p. 5501). The position has second largest
fields of gas in the world. The acquisition increased the net resource base and reserve of the BHP

BHP FAYATEVILLE SHALE ACQUISITION 5
by 45%. By then the assets could produce more than 400 million cub/ft. of gas in a day. This
included the prospect of development options supporting a 40 year substantial higher production
in operating life. The company also agreed to sign a service agreement of 12 months that helped
a safe operations transfer to the company.
Factors affecting impairment loss measurement
The BHP is a company that has experienced continued growth and profit making for
quite some time in the natural oil and gas extraction. However, in some of the projects the
company experienced harsh market prices leading to losses that made it close some of the
operations including the Fayetteville oil rig drilling. The various factors that affected the
impairment loss measurement in the project include the following (Hagström, and Adams, 2012,
p.99). One is the strength of the diversified investing portfolio of the company of tier one
resources of natural oil and gas. For quite many years the company has been implementing their
strategy of investing in long life, large and high quality assets that have given the company huge
growth and superior margins of profits all thorough the economic cycle and thus creating a long
term value of share value. In this case it became quite hard to prospect any significant losses in
some of the projects such as the Fayetteville (Zimmerle, et al. 2017, p.73). The performance
affected their being able to notice losses since the growth reflected overall asset quality. The
company strategy involved maximizing production while being committed to obtain the prices
for their products in the market. In every year, the company reported production records for
various commodities that include consecutive records in the iron ore production and this unable
to keep note of any single commodity profile.
The other factor is the robust demand that was underpinned by the industrialization and
urbanization of china and several other developing nations on the scale that lifted thousands of

BHP FAYATEVILLE SHALE ACQUISITION 6
people in the areas out of poverty. In this case, the company focused on investing in several
projects of natural gas and oil without minding on better methods of reporting. The resources
became fundamental of the company and economic growth in areas of operations (Kelton, 2013, p.
211). With present growth and continued profit making, the company failed to test for loss
impairment for quite some time until the market prices for oil and gas deteriorated. In this case, it
always important for companies to test for impairment among the many assets before it is too
late. The other factor involves the use of the wrong method of accounting. Companies especially
those in the development and exploration of natural gas and oil have two options that help then
choose the approach of accounting to use (Lynch, 2013, p.69). These include the SE or successful
efforts method and the FC or the full cost method. The two differ in how specific operating
expenses get treated in relation to the extraction of new gas and natural oil reserves. In this case,
the accounting method that the BHP used might have affected how they obtained their cash flow
and net income numbers that were reported in the end year financial reports.
Measurement evaluation
It is quite interesting that the Sewell company had also participated by over 58% to
prepare natural oil and gas in Fayetteville’s reserves in Chesapeake. In this case the BHP
Company did not assess the reserves independently. In this case it was quite hard for the
company to notice any impairment loss recognition based on trust to the Sewell leaving it to do
the assessment alone (Calderón, et al. 2018, p.719). The 10 Tcf values of resources as given in the
BHP annual report, the value should actually have been reflecting in the Chesapeake annual
report of 2010 by 31 of December. However, the document reflected only the value of proved
reserves based on the AASB rules. The reason for this could have been that the value had been

BHP FAYATEVILLE SHALE ACQUISITION 7
rounded off from the Chesapeake’s report during the institutional analyst and investor meeting
presentation slides.
The Fayetteville growth and operational summary as given to the BHP Company
included the following; the company had successfully developed as the second largest position in
the oil and gas extraction industry. It had increased the production value to 41% YTD towards
more than 260mmcfe in a day. The reserves continues to improve per well as per the geo-
steeling, completion and drilling expertise yielding dividends and the average 2.9 bcfe when
compared to the targeted 2.4 bcfe in the 2009 YTD (Yacovitch et al. 2017, p.5). The company had
also 4,100 as future development drilling locations with a functional 12 rigs from the 19 year
inventory. It had also 1.0 tcfe for the proved reserves of natural gas and oil as well as over 9.8
tcfe of unproved and un-risked reserves of the same product. It is interesting to notice that the
proved reserves of the Fayetteville rigs were reflected as just 1 tcfe. The 4,100 new oil wells and
the 9.8 tcfe resources needed EUR (estimated ultimate recovery) of about 2.4 bcfe for every well
(Rajtar, 2010, p.361).
However there were early warnings from the Chesapeake oil shale in Fayetteville. The
company claimed that it had over 2.65 bcfe from every well from the Barnett shale in their report
(Anderson, 2013, p.1). However the same year of their report art Berman from Houston who was a
geologist for gas and oil came up with a published article that indicated declined rates of the
products from the fields, facts are things quite stubborn. In the real sense no one gave a listening
hear to this fact. By 2011 of august some months after the BHP acquisition of the Fayetteville oil
reserves from Chesapeake, there was another published analysis by the same geologist in what
he called shale gas of US; higher cost, less abundance in the blog of oildrum (Selzer, 2013, p.46).
He confirmed that most of operators in the company especially the BHP used the hyperbolic

BHP FAYATEVILLE SHALE ACQUISITION 8
single curvature for their profiles involving production which results in reduced rates if decline
in the later years. This goes up to 50 years indicating huge values of EURs (Beckwith, 2012, p.43).
In the real sense, observations indicate that the declines should follow an exponential decline of
2 stages with a 12 year well life against lower EURs. From the analysis of the BHP reports, it
can be noted that the company invested in the project just as prices were peaking but then started
going down. The trends indicate that from the shale gas decline, EUR value from every well was
approximated as one-half of presented value by operators. In this case it means that the
Fayetteville shale had only 1.1 bcfe from each oil well.
Fayetteville investment accounting treatment
During the disclosure for impairment losses in the asset group for an operation, the loss
should be allocated to the long-lived assets for the group using a pro rata basis indicating their
relative carried amounts. The only exception is when the allocated loss to the individual assets
causes a reduction to the carried amount below the fair values. When it is possible for the CPAs
to determine the fair values without undue effort and cost, these assets need to be carried at the
amount (Berman, and Pittinger, 2011, p.17). The process requires one to add an allocated
impairment loss. The carrying value that is adjusted after allocating the impairment loss value is
then the new depreciation cost basis or the amortization over the useful life remaining for the
asset. According to the AABS code, businesses are required to include impairment loss values to
the income from the continued operations just before the line of income taxes on the income
statement.
However, NPOs or not for profit organizations should include this loss from their
continued operation’s income in the activities statement. When the subtotal like the operational
income is presented, the CPAs need to use the impairment loss while determining the amount.

BHP FAYATEVILLE SHALE ACQUISITION 9
The other needed data that companies need to disclose in their notes that involve financial
statements include; a well description about the long-lived asset that has impaired as well as the
circumstances and facts that led to the impairment (Zhiltsov, and Zonn, 2016, p.29). When not
presented separately on the statement face, the impairment loss amount should be given
including a caption on the activity statement or income statement that contains the loss.
Businesses are also required to give the method that has been applied in determining the asset’s
fair value. Lastly, if it is applicable, the segment that reports the impaired long lived asset under
the FASB number of statement.
Conclusion
From the analysis it clear that the BHP Company acquired the Fayetteville shale of
natural gas and oil when the peak was just approaching. At the same time, the company failed to
conduct a good evaluation form the pas report of the Chesapeake firm but depended on what the
Sewell Company had done. This means that the company was not able to not that the oil and gas
reserves had issues. At the same time the company applied the wrong accounting methods while
calculating the fair market value for the Fayetteville shale project.

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References
American Association of Petroleum Geologists, Energy Minerals Division pwarwick@ usgs. gov
http://emd. aapg. org, 2014. Unconventional energy resources: 2013 review. Natural resources
research, 23, pp.19-98.
Anderson, O.L., 2013. Shale Revolution or Evolution: Opportunities and Challenges for Europe. Global
Bus. L. Rev., 4, p.1.
Beckwith, R., 2012. Making Sense of the'Overnight'Shale Gas Revolution. Journal of Petroleum
Technology, 64(02), pp.42-46.
Berman, A. and Pittinger, L.F., 2011. US shale gas: less abundance, higher cost. The Oil Drum, 5(8),
pp.12-36.
Calderón, A.J., Guerra, O.J., Papageorgiou, L.G. and Reklaitis, G.V., 2018. Disclosing water-energy-
economics nexus in shale gas development. Applied Energy, 225, pp.710-731.
Hagström, E.L. and Adams, J.M., 2012. Hydraulic fracturing: Identifying and managing the
risks. Environmental Claims Journal, 24(2), pp.93-115.
Johnson, D., Heltzel, R., Nix, A., Darzi, M. and Oliver, D., 2018. Estimated Emissions from the Prime-
Movers of Unconventional Natural Gas Well Development Using Recently Collected In-Use Data in the
United States. Environmental science & technology, 52(9), pp.5499-5508.
Kelton, M., 2013. Symposium: Australia–US Economic Relations and the Regional Balance of Power
Australia–US Economic Relations following the 2005 Free Trade Agreement. Australian Journal of
Political Science, 48(2), pp.208-220.
Lynch, M., 2013. Uncertainties threaten natgas development. Oil & gas journal, 111(3), pp.66-71.
Rajtar, J.M., 2010. Shale gas-how is it developed?. Wiertnictwo, Nafta, Gaz, 27, pp.355-367.
Selzer, H., 2013. INTERNATIONAL JOINT VENTURES. Petroleum Accounting and Financial
Management Journal, 32(2), p.46.
Spence, D.B., 2017. Corporate Social Responsibility in the Shale Patch. Lewis & Clark L. Rev., 21, p.387.

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Sun, Z., Shi, J., Wu, K. and Li, X., 2018. Gas flow behavior through inorganic nanopores in shale
considering confinement effect and moisture content. Industrial & Engineering Chemistry
Research, 57(9), pp.3430-3440.
Yacovitch, T.I., Daube, C., Vaughn, T.L., Bell, C.S., Roscioli, J.R., Knighton, W.B., Nelson, D.D.,
Zimmerle, D., Pétron, G. and Herndon, S.C., 2017. Natural gas facility methane emissions:
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Zhiltsov, S.S. and Zonn, I.S., 2016. Shale Gas Production in the USA. In Shale Gas: Ecology, Politics,
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Zimmerle, D.J., Pickering, C.K., Bell, C.S., Heath, G.A., Nummedal, D., Pétron, G. and Vaughn, T.L.,
2017. Gathering pipeline methane emissions in Fayetteville shale pipelines and scoping guidelines for
future pipeline measurement campaigns. Future Energy Supply, pp. 23-105. Springer, Cham, 2019.