BHP Billiton Ltd. (NYSE: BHP) plans to lift exploration spending by 29% next year, allocating nearly all its $900 million budget to finding oil and copper.
Miners fret about future production even in years of huge oversupply. But the move by the world's biggest miner to lift exploration spending signals a shift away from M&A that some in the market had expected would help drive growth after prices collapsed.
BHP and its peers, such as Rio Tinto and Glencore, haven't ruled out future acquisitions, but they say few top quality projects are up for sale at the right price, leaving no other option but to grow by exploring.
"Companies operate in a cyclical world and it's about setting up for long-term growth," said Keith Goode, an analyst for Eagle Mining Research.
"There may be too much out there at the moment, but copper and oil aren't going away," he said.
For BHP, fiscal 2017's exploration figure represents 18% of its overall capital budget of $5 billion.
BHP is already the world's second-biggest copper miner but only a mid-sized oil producer. The company's petroleum assets include acreage in U.S. shale plays such as the Eagle Ford, Permian Basin, Haynesville/Bossier and Fayetteville.
The lion's share of the budget will flow to offshore conventional oil drilling, with copper being allocated about 25%, according to analysts.
"BHP is making it clear that oil and copper top the list for growth potential," said Shaw and Partners mining analyst Peter O'Connor.
"M&A isn't off the agenda, but BHP isn't waiting around for the next big opportunity," O'Connor said.
M&A Deals Slow
An investor said it was in line with Chief Executive Andrew Mackenzie's strategy to focus on commodities in the company's portfolio that offer the greatest growth potential.
"We've known for some time that they want to spend a bit more on conventional oil and now we're seeing it," said Neil Boyd-Clark, managing partner of Arnhem Investment Management, which owns BHP stock.
BHP unveiled its plans to boost exploration spending by 29% over fiscal 2016 in a presentation to Citigroup investors.
BHP is banking on future demand coupled with fewer oil wells and falling copper mine grades to erode supply and lift margins.
The increase in exploration spending comes as a flurry of M&A deals earlier this year slows.
Petroleum exploration by BHP will focus on deepwater basins in the Gulf of Mexico, the Caribbean and the Northern Beagle basin, off the coast of Western Australia, BHP's head of geoscience, Laura Tyler, told the Citigroup investors' briefing.
Copper exploration is targeting Chile, Peru, the U.S., Canada and South Australia, according to Tyler.
"We are investing at a time when most in our sector continue to reduce discretionary spend," Tyler said.
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