BHP versus Elliott – the fight isn’t over yet

It is hard to believe activist shareholder Elliott Management is about to stop agitating for change at BHP now the company has caved in to its demands to ditch its US oil and gas shale assets.


Quite the opposite. It will be emboldened to pursue other demands it thinks necessary for BHP to clean up its act.

It is too simple to assume that because BHP delivered a massive boost in underlying profits to $US6.7 billion ($8.5 billion), from $US1.2 billion last year, and more than tripled the dividend to shareholders that this would provide it sufficient armour to push Elliott into retreat.

First, this is because the overwhelming majority of the improved profit performance was due to higher prices in the commodities BHP mines and, second, because despite the massive jump in profit, it came in below what the market was expecting.

Sure, BHP chief executive Andrew Mackenzie has been doing a good job improving efficiency, reducing debt and trimming costs and capital outlays but Elliott wants more structural change.

In particular, it wants BHP to get out of the oil business altogether and at this stage the company won’t have a bar of it.

Neither will BHP acquiesce to Elliott’s push to collapse the dual-listed structure.

Having said that, Elliott has scored plenty of goals in its BHP game since the starting whistle sounded earlier this year.

The most important was BHP’s decision to sell the onshore oil/gas shale (unconventional) assets in the US.

While BHP is dressing up this announcement as its own decision – rather than a result of pressure from Elliott and some of its supporting fellow shareholders – the fact is that BHP first responded to this demand in April with a firm no.

In BHP’s initial response to rejecting this part of the Elliott proposal, it said among other things: “Onshore US expected to be free cash flow positive in FY17 and poised for growth as prices recover.”

On Monday, Mackenzie played the debate differently, saying that it had been going through the process of how to deal with these assets for years. He said the reason for selling was because the company couldn’t find additional shale assets to acquire in order to bulk up that division.

But it appears most likely that BHP had wanted to hold on to these assets in order to improve them to claw back some of the billions of capital blown up buying them. It paid $US20 billion for the assets and spent a further $US17 billion developing them – mostly under Mackenzie’s predecessor, Marius Kloppers.

However, Mackenzie did concede that the views of shareholders were always taken into account.

Meanwhile, an additional Elliott goal was revealed on Tuesday – the decision about developing BHP’s potash business would now be put on hold for a few years rather than going to the board for final approval next year.

Elliott had been hugely critical of BHP taking the plunge into potash on the basis that there was a risk of blowing up more capital, particularly given the current price of this commodity.

Elliott was also successful in its push for BHP to appoint a well-credentialled, cleanskin chairman to take over later this year when Jac Nasser retires. Although BHP may have done this without prodding.

There are a range of views from analysts and shareholders on whether BHP should unify its capital structure, but the majority are not in favour.

There are also plenty of experts looking at how much the shale assets are worth, (some say upwards of $US11 billion), how long it will take to sell them, how a deal could be structured and what it will mean for BHP earnings.

Mackenzie has a preference for a trade sale, but will look at other options.

A report last month by Macquarie found “in aggregate, we find that the valuation of the US onshore petroleum business is ~$US10 billion, driven mainly by the Permian and Eagle Ford. However, our analysis includes a number of assumptions, and risks to execution exist in achieving that value, which when taken into account, provide a more moderate view on valuation of $US8-10 billion for the business”.

It also said: “Shale sale is earnings accretive but value neutral: A sale of the shale assets for $US8 billion would be valuation neutral but deliver a material improvement to group earnings and cash flow. Our shale sale scenario delivers 10-25 per cent earnings per share upgrades for full year 19-21 and a 20 per cent reduction in capex.”

The bottom line is that BHP doesn’t want to hand over the company’s future strategy to Elliott (a 5 per cent shareholder).

Mackenzie is steadfast in his views that the conventional petroleum business is working well and delivering good returns and that there will be plenty more of that in the coming years.

He says there will be plenty of time (a couple of decades) of puffing on this cigar because electric cars will change the dynamics of the oil industry.

Not everyone agrees.