Business

Thu May 08 00:14:47 PDT 2008

LONON, May 7 (Reuters) – The head of mining group BHP Billiton said its oil business has buoyant growth prospects, striking back at criticism from bid target Rio Tinto that the unit was struggling to replace reserves.

It may appear BHP’s lucrative petroleum division had a limited future because oil firms can only legally report proven reserves in its results statements, unlike mining groups with minerals, Chief Executive Marius Kloppers told an investor briefing on Wednesday.

"Unfortunately, for those that do not understand this that well, this gives the impression that an E&P (exploration and production) company is chasing its tail in replacing reserves."

In addition to BHP’s proven reserves of 1.35 billion barrels of oil equivalent, it has 2.24 billion barrels of probable reserves and contingent resources, the head of the unit, Mike Yeager, told the briefing.

"We have a deep inventory of future development options that we’ve already identified where hydrocarbons have already been discovered," he said.

The CEO of Rio Tinto, which has spurned an all-share takeover bid from BHP as undervaluing his firm, knocked BHP’s oil business last month saying the sector was "always struggling to replace reserves, much less trying to grow".

BHP and Rio have been sparring about the takeover bid, currently worth $173 billion, which BHP says would lead to around $3.7 billion in cost synergies and benefit both companies’ shareholders.

BHP’s petroleum division, which accounts for a fifth of operating profit, has a 76 percent EBITDA margin, the highest in the firm. EBITDA — earnings before interest, tax, depreciation and amortisation — is a key measure of cash flow.

Yeager said earnings in the division will be helped because about 60 percent of LNG contracts have "repricing" elements that will kick in over the next several years.

"We feel that this may add at least $2 billion per annum to our base case EBITDA for the petroleum division by the end of the next four year period," analyst Michael Rawlinson of Liberum Capital said in a research note.

(Reporting by Eric Onstad; Editing by Rory Channing)

Provided by Reuters

© Reuters 2008 All rights reserved