BHP studying shale gas sale as hedge fund Elliott demands review

LONDON and MELBOURNE (Bloomberg) -- BHP Billiton Ltd. is considering further sales of its U.S. shale gas assets as it fends off the second round of attack from activist hedge fund Elliott Management Corp. over the future of the energy business within the world’s biggest mining company.

“If there is a natural owner out there who believes more upside can be achieved within this shale business than we do, then we will be more than happy to talk turkey with them,” CEO Andrew Mackenzie told investors at a conference in Barcelona on Tuesday. “We are actively considering further divestments. We will pursue only those options that fully realize the value of our acreage.”

Earlier on Tuesday, billionaire Paul Singer’s Elliott sent a second letter to the board of BHP, this time demanding an independent review of the company’s oil division, which Deutsche Bank AG values at about $22.5 billion. The two sides are scheduled to meet on the sidelines of the conference tomorrow, according to two people familiar with the situation.

BHP spent about $20 billion buying U.S. shale assets earlier this decade and has since written off more than half the value of the acquisitions. Investors have long criticized the timing of the deals, which preceded a slump in the oil price.

“We acknowledge that the acquisitions that took us into this business were poorly timed, that we paid too high a price,” Mackenzie said, pointing to a reduction in operating costs within the business. “We’ve had to move heaven and Earth to try and ensure that we were absolutely best in class in the shale assets that we’ve chosen to retain.”

BHP, which has halved its shale holdings since 2012, previously flagged its intention to sell parts of a Texas gas field and the possibility of exiting the Fayetteville shale gas assets in Arkansas.

The company is now fighting a rising tide of analysts and investors who back the sale of the shale assets.

The company should sell the assets and could receive about $9 billion based on recent deals in the sector, Deutsche Bank analysts including Paul Young said in a May 4 note. Divesting the assets would provide “additional capital to focus on the higher returning conventional assets and minerals portfolio,” the analysts said.

Citigroup analysts say activism among shareholders could ultimately result in the breakup of BHP or a significant change in its structure, according to a May 14 report. Still, in the short term, a spinoff of the oil division delivers the most value, they said.

Elliott carried out talks in the past month with investors holding tens of billions of dollars of BHP shares and believes there’s “extremely broad and deep-rooted shareholder support” for an assessment of the petroleum division, the New York-based fund said Tuesday in a statement, without naming the shareholders.

BHP has destroyed about $31 billion in value through its foray into U.S. shale and failed petroleum exploration as well as a further $9 billion in poorly timed share buybacks, Elliott said in its letter to the board. “We have seen a significant groundswell of dissatisfaction among shareholders, which is rooted in BHP’s chronic under-performance,” the fund said.

BHP rejects Elliott’s claim that it has been misleading in responding to proposals and will review and reply to the letter as appropriate, the company said in an emailed statement. Mackenzie is due to hold shareholder talks over the coming weeks.

BHP advanced 0.4% to 1,195 pence in London trading Tuesday.

“What this shows is that Elliott aren’t fly-by-night, they are clearly sticking around,” said Andy Forster, senior investment officer at Argo Investments Ltd., which manages more than A$5 billion ($3.7 billion) and holds BHP’s Sydney-listed shares. “They are agitating for changes that may deliver short-term benefits, but not necessarily longer-term value. I don’t think there’s that much to be gained from an independent review of the oil business.”

While Elliott favors a full or partial spin-off of the petroleum assets, other options could include separate sales or a demerger of the U.S. assets and a second spin-off in Australia of the remaining operations, according to the fund, which has assets under management of about $33 billion.

BT Investment Management Ltd., which manages about A$87 billion of assets and holds shares in BHP, has argued the company should sell the shale assets. Aberdeen Asset Management Plc, the second-largest holder of BHP’s London-listed shares, according to data compiled by Bloomberg, has said it wouldn’t be against any new review of the petroleum unit.