UPDATE 2-BHP eyes boost to shareholder returns as output rises

* BHP signals well placed to reward shareholders

* Quarterly iron ore output rises 16 pct

* Petroleum output slips, but maintains guidance

(Adds CEO, analyst quotes, link to table)

By James Regan

SYDNEY, Jan 22 (Reuters) - BHP Billiton BHP.AX BLT.L posted strong quarterly iron ore, coal and copper output, putting it in a position to meet shareholder pressure for higher capital returns as spending on new projects winds down.

However, any capital return may not come before the 2015 financial year starting in July as the the world's biggest miner looks to build up more cash from recently completed projects, and as iron prices start to ease, according to analysts.

"I think it's not likely a calendar 2014 story, more likely 2015," said Ben Lyons, an analyst at ATI Asset Management, which owns shares in BHP. "The key determinant will be commodity prices and currencies."

Investors including fund manager BlackRock BLK.N , have called on BHP and other miners to boost shareholder returns as the era of high construction costs to build new mines shifts into a lower-cost production phase.

BHP, like its peers, has focused on reducing costs, spending less and selling unwanted businesses over the past 18 months, after splashing out on expansions during the mining boom.

Three of BHP's four main growth drivers improved in the December quarter, with a 16 percent increase in iron ore output from a year ago and record production at its coal business in Australia's Queensland state.

Copper output also rose, but petroleum production - the second-biggest revenue earner last year after iron ore - fell 4 percent, BHP said in its production report on Wednesday.

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IRON ORE PRICE

Chief Executive Andrew Mackenzie, appointed chief executive in May, said the miner aimed to boost returns via financial discipline and internal competition for funds and that productivity gains would continue in the second half.

"This strategy leaves us well positioned to deliver a substantial increase in free cash flow and higher returns to shareholders," he said in a statement.

A buyback is seen as a more likely way to reward shareholders because BHP stock is listed on both the London and Australian stock exchanges. Under a buyback stockholders have the option to tender a portion or all of their shares at a premium to the market price.

BHP bought back more than $22 billion worth of its shares between August 2004 and June 2011. The miner also has a progressive dividend policy, under which it has pledged to increase the amount of its dividend every year.

BHP has been boosted by a strong price for iron ore, which held up despite concerns that softening economic growth in China would curb steel production.

Despite forecasts by analysts such as Goldman Sachs and UBS for a fall under $80 a tonne, iron ore prices rose above $130 for most of the second half of 2013, triggering a 20 percent rise in BHP's share price in the final six months of the year.

Macquarie Bank sees iron ore finishing 2014 at $115-$120.

PETROLEUM SLIPS

BHP posted a drop in quarterly output from its petroleum division as it worked to extract more oil from its Eagle Ford shale gas property in the United States, but stuck to its fiscal 2014 guidance of 250 million barrels of oil equivalent.

Unlike rivals such as Rio Tinto and Glencore Xstrata

, BHP has relied on its petroleum business to offset soft periods in metal and coal markets. Its footprint in the sector has grown with the advent of shale gas and oil exploitation in the United States.

Petroleum accounted for $13.2 billion in revenue last year, behind the $20.2 billion generated by iron ore.

Metallurgical coal output in Queensland rose 10 percent in the December quarter to 9.6 million tonnes, beating an estimate by UBS of 8.8 million tonnes.

Copper output rose 6 percent from a year ago to 440,000 tonnes, in line with expectations.

Shares in both BHP and Rio eased 1.7 percent on Wednesday in an overall market down 0.8 percent.

(Additional reporting by Sonali Paul; Editing by Richard Pullin)

((jim.regan@thomsonreuters.com)(+612 9373-1814)(Reuters Messaging: jim.regan.reuters.com@reuters.net))

Keywords: BHP PRODUCTION/