BHP CEO rejects oil spinoff for third time after Singer demand
MELBOURNE (Bloomberg) -- The previous two times BHP Billiton boss Andrew Mackenzie ran his ruler over the company’s $29-billion oil unit he decided it was still a good fit for the world’s biggest miner. A fresh review following the urging of billionaire activist Paul Singer came up with the same answer.
“I’ve asked the question about the fit of petroleum in our business at every major milestone in my time at the company,” CEO Mackenzie said Wednesday on a call with analysts, setting out a detailed rejection of Singer’s Elliott Management Corp.’s call for a spinoff of the U.S. petroleum operations as part of a company-wide overhaul. “I continue to conclude petroleum is a good fit with our current strategy.”
Since opening discussions with Elliott eight months ago on the fund’s proposals, the producer sought advice from two investment banks on the petroleum portfolio, CFO Peter Beaven said on a call with analysts. Mackenzie also ordered assessments on the division’s future following his appointment as CEO in 2013 and when company completed the 2015 spinoff of unwanted metals and coal assets into South32 Ltd., he said on a separate call with analysts.
The oil unit, with assets in areas including the U.S., Australia and the Caribbean, offers BHP a “unique form of diversification and this makes us unusual -- but unusually advantaged,” Mackenzie said. The unit’s average margin on underlying earnings before interest, tax, depreciation and amortization of 66% over the past five years means the oil division is BHP’s best performer, he said. It’s worth about $29 billion, according to Morgan Stanley.
A spinoff of the oil unit wouldn’t add value, according to Randal Jenneke, head of Australian equities at T. Rowe Price Group Inc., which globally manages about $811 billion in assets. “It’s all been discussed many, many times for many, many years,” Jenneke said by phone.“If it was obvious that there was a big re-rating there waiting to happen, then of course they’d have looked at it.”
As the issue was raised by Elliott “I’ve kind of dwelled a bit more on that,” Mackenzie said in a separate call with reporters. “I wouldn’t want to give you the impression that somehow petroleum was the loosest brick in the current BHP Billiton wall,” he said.
Singer’s Elliott has urged Melbourne-based BHP to spin off U.S. oil and gas assets it estimates to be worth $22 billion, argued for higher returns for investors and proposed changes to the company’s corporate structure that would create a primary listing in London. The costs and risks associated with the proposals outweigh the benefits, Mackenzie said on the analysts’ call.
While BHP will continue to review its corporate structure, the company’s focus is on its balance sheet and it doesn’t see the time as right for a $6-billion buy-back as proposed by the hedge fund, CFO Beaven said on the call with analysts.
The review by the two investment banks was discussed at board level, Beaven said. “Those investments banks, which are pretty motivated to come back with the answer to say, ‘yes, there’s something to do here, a transaction to be made,’ they didn’t come back with that answer. We are feeling very comfortable with that.”
BHP’s Sydney-listed shares have pared gains after jumping 4.6% Monday when Elliott publicly disclosed details of its proposals and talks with management. The shares fell 0.4% to A$25.32 at Wednesday’s close in Australia.
The producer has been working with advisers from Goldman Sachs Group Inc. for several months in response to plans put forward by Elliott, people with knowledge of the matter said Tuesday.
Long-term value
BHP earned about 20% of its underlying profit from the global oil business in the six months ended December, less than half the proportion coming from iron ore, data compiled by Bloomberg show. Oil assets are likely to deliver increasing value over the longer term, according to Mackenzie.
“Our petroleum assets fit well with big coal, big copper and big iron ore,” Mackenzie told analysts on the call. Knowledge and practices in mining have been adopted in its U.S. shale unit, while coal and potash operations are utilizing ideas from the oil division, he said.
BHP in December outbid BP Plc to partner with Petroleos Mexicanos on Trion oil field in the Gulf of Mexico and in February approved its $2.2-billion share of spending on BP’s Mad Dog Phase 2 oil project. The company is the fourth-largest producer in the U.S. Gulf of Mexico and the eighth-largest in U.S. shale fields.
More than half of BHP’s capital expenditure over the next five years will be directed to the oil division, according to Macquarie Group Ltd. The producer is also prioritizing oil exploration, allocating $820 million of a $1-billion budget in the current fiscal year to petroleum, BHP said in a February presentation.
The producer last year booked a $7.2-billion pretax impairment against its U.S. shale assets on lower oil prices.
