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BHP facing uncertain future as shareholders push for change

17th November 2017

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

     

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PERTH (miningweekly.com) – Ratings agencies and analysts have raised concerns about the future of mining major BHP in the wake of actions taken by so-called activist shareholders.

The mining giant’s second-largest holder of its London-listed shares, fund manager Elliot Associates & Elliot International, has been picking at BHP since August last year and, in April this year, made public its demands for strategy changes, arguing that nearly $40-billion in shareholder value had been lost by the miner.

The fund manager, which holds a 4.1% interest in BHP, proposed that the major unify its dual-listed company structure into a single Australian-headquartered and -tax-resident listed company, maintaining a primary listing in London and a secondary listing in Sydney.

It also suggested that BHP demerge and separately list its US petroleum business on the NYSE, while also adopting a consistent and value-optimised capital return policy to monetise the franking credit balance through discounted off-market buy-backs.

Elliot argued at the time that its analysis indicated that the US petroleum business had not been able to successfully contribute to shareholder value at BHP, since it provided no meaningful diversification benefits for BHP as a whole, and since there was a lack of synergies between BHP’s US petroleum business and its mining assets.

It also argued that the intrinsic value of the petroleum assets was being obscured by bundling it with BHP’s other assets.

Australian Treasurer Scott Morrison was quick to warn the US fund manager that plans to shift BHP’s primary listing offshore would be considered a criminal offence in Australia, and that directors of the company would be held liable.

Morrison described the proposed restructure as ‘unthinkable’, stressing that it would not comply with the conditions set for the miner to operate in Australia under a 2001 merger between BHP and Billiton.

That transaction had been subject to a number of conditions, including that the merged entity remain listed on the ASX and continue to be the ultimate holding company for the businesses it owned prior to the merger, as long as they remained part of the BHP group.

“These conditions apply indefinitely unless revoked or varied by me. It is clear that the proposals under discussion would not be consistent with these conditions,” Morrison said.

“Should BHP implement Elliott’s proposal, contrary to the conditions imposed in 2001, it may commit a criminal offence and could be subject to civil penalties under the Foreign Acquisitions and Takeovers Act. If the company is convicted of an offence, the directors could be held personally liable,” the Treasurer said.

BHP CEO Andrew Mackenzie pointed out that the listing restructure could wipe out at least $1.3-billion in value, saying the restructure could make buy-backs less attractive from a shareholder perspective.

He said that unifying the dual-listed company structure would also reduce the proportion of franking credits that could be used when the group conducted off-market buy-backs of securities quoted in Australia on the ASX, reducing the potential returns for all shareholders.

While Elliot’s proposal to spin off the US oil and gas assets was initially rejected, in August, BHP announced plans to exit the US shale gas business, which it had bought for $20-billion five years before.

The company said it had determined that the onshore US assets were noncore to its portfolio, and that it was “actively pursuing options” to exit these assets.

“The shale acquisitions were poorly timed – we paid too much, and the rapid pace of early development was not optimal,” Mackenzie said, noting that, when the company entered the industry, the objective had been to leverage its systems and scale to become an industry leader in shale and then replicate this model around the globe.

“However, following a global endowment study two years ago, it became apparent to us that opportunities to replicate US shale oil elsewhere did not exist.

“So, since then, we have quickly improved our capabilities in the US, significantly [lowering] investment levels, and we have also reduced our footprint through a series of divestments and optimised our remaining position through acreage trades and swaps. This sharpened focus informed our regular portfolio review. And we have now concluded that all these shale assets are noncore.”

Mackenzie said that the company was pursuing a number of options to exit its shale business, with the preference being to sell the business through a small number of trade sales.

WARNING SIGNS
However, BHP’s decision to divest from its US shale assets has seen the company’s credit rating tumble, with credit ratings agency Fitch warning that the loss of these assets would take away a material portion of the expected future growth of BHP’s petroleum division.

Fitch’s recent ‘Negative Outlook’ classification for BHP also reflected the emergence of other factors, which the ratings agency said could result in a lower rating.

“In addition to a poten- tially weaker operating profile if the US shale assets are sold, we are concerned that the presence of an activist shareholder on the company’s register could result in an increased level of shareholder-friendly measures, such as share buy-backs and/or special dividends,” Fitch said in a research note.

“Such a move could intro- duce a higher level of volatility to BHP’s credit profile and lead us to reconsider the ratings benefit we have historically given the company for its stable financial policies and credit profile.”

While BHP examined the ‘multiple alternatives’ to the exit of its US shale assets, the miner will complete well trials and acreage swaps and will investigate midstream solutions to increase value, profitability and marketability of the onshore US acreage.

In its financial results for the full year ended June, the company allocated $6.9-billion for capital and exploration expenditure in 2018, which included some $1.2-billion for exploration and development work at the onshore US acreage.

The company told shareholders at the time that its focus would be on the liquid fields to maximise value by completing trials to increase inevitable inventory, with up to five additional rigs planned, subject to market conditions.

Edited by Creamer Media Reporter

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