BHP Billiton should jettison its U.S. petroleum business (offshore and on), which is undervalued by the market, does not contribute value to the company and does not mesh with BHP’s traditional mining operations, an activist shareholder said Monday in a letter to company directors.
“Based on commonly utilized valuation metrics for comparable businesses, the indicated value for BHP’s U.S. petroleum business is [approximately] US$22 billion, which is well in excess of the current analyst consensus valuation for that business,” said the Elliott Funds, which hold 4.1% of BHP Billiton plc.
BHP rejected the Elliott proposals.
Elliott said the U.S. business does not provide “meaningful diversification” to BHP as a whole and there are no synergies between the U.S. business and the company’s mining assets. “...[I]ts intrinsic value is being obscured by bundling it with BHP’s other assets,” Elliott said.
“We believe that within the confines of the existing group, BHP’s U.S. onshore acreage opportunities are extremely limited. BHP has competing capital allocation alternatives -- including its world-beating mining assets such as those within its iron ore division, and highly value-accretive post-unification off-market BHP share buybacks at a 14% discount to market price.
“...BHP’s management simply cannot justify allocating the capital which the U.S. onshore assets would need for the U.S. petroleum business to realize its growth potential or meaningful corporate expansion activities.”
Demerging and listing the U.S. business separately on the New York Stock Exchange would unlock the value of the assets and allow the business to be properly capitalized, Elliott said.
Elliott is making two other recommendations to BHP management. The company’s dual-listed structure should be combined into a single, Australia-headquartered and tax-resident listed company. It said BHP should adopt “a consistent and value-optimized capital return policy…” and cited the company’s misadventure in U.S. shales.
“BHP is expected to generate [approximately] US$31 billion of excess cash flow in the next five years, assuming the current 50% payout ratio of net income. Unfortunately, BHP has previously used excess cash to make value-destructive acquisitions when it acquired certain Fayetteville [Shale] assets and Petrohawk.”
In early 2011 BHP acquired the Fayetteville Shale assets of Chesapeake Energy Corp. for $4.75 billion in cash. Later that year it acquired Petrohawk Energy Corp. for $12.1 billion. Asset writedowns followed a few years later. BHP, according to its website, currently holds more than 838,000 net acres in the Eagle Ford Shale, Permian Basin, and Haynesville Shale, as well as the Fayetteville.
The company was already active in the U.S. Gulf of Mexico where it operates two fields: Shenzi (44% interest) and Neptune (35%). It holds nonoperating interests in three other fields: Atlantis (44%), Mad Dog (23.9%) and Genesis (4.95%).
Instead of such “badly timed acquisitions” as the Fayetteville purchase, the company should return value to shareholders through buybacks, Elliott said on Monday.
BHP’s offshore U.S. assets should go as well, Elliott said. “We see the demerger of BHP’s Gulf of Mexico assets in combination with the U.S. onshore petroleum assets as providing a standalone U.S. petroleum business with consistent cash flow to fund its own further expansion, allowing BHP to increase its focus on its core competencies and also helping the value of BHP’s remaining core portfolio to positively re-rate.”
BHP last December was high bidder in a Petroleos Mexicanos (Pemex) auction, offering $624 million for the first deepwater partnership ever for Pemex.
In a statement Monday BHP said it has reviewed the Elliot proposals and has been in talks with the investor “over many months.” The costs and associated risks of what the firm is proposing would outweigh any potential benefits, BHP said.
“Elliott’s [U.S. petroleum business] demerger proposal is based on a view that investors would ascribe a higher value for these assets in a separately listed entity,” BHP said. “There is no obvious discount in BHP Billiton’s trading multiples relative to the weighted average of relevant mining and oil and gas peers. BHP Billiton has disclosed the information the market needs to fully value the petroleum business.
“BHP Billiton’s approach is to optimise the long term value of the Petroleum business through operating excellence.”
Elliott manages two funds: Elliott Associates LP and Elliott International LP, with assets under management totaling more than US$32.7 billion.