In a public showdown over BHP Billiton Ltd.’s (NYSE: BHP) assets and structure, the company rejected a high-profile stockholder’s proposal to spin off its Eagle Ford Shale and Permian Basin oil business.
Elliott Associates and Elliott International LP—hedge funds controlled by billionaire Paul Singer—own 4.1% of BHP Plc stock and has been “in dialogue” with BHP for several months. In an April 10 letter targeting other shareholders, Elliott argues BHP’s oil assets are undervalued because they are obscured and financially overshadowed by the company’s more lucrative minerals assets.
BHP offers “a first-class portfolio of assets which are failing to deliver optimal value for shareholders,” Elliott said.
However, BHP said on April 10 that after discussions with Elliott and a review of the proposals, it sees more risks than potential reward coming from realignment.
“Elliott’s proposal includes BHP Billiton demerging its U.S. petroleum assets into an entity to be listed on the New York Stock Exchange (NYSE),” the company said. “Elliott’s demerger proposal is based on a view that investors would ascribe a higher value for these assets in a separately listed entity.”
BHP’s oil business includes about 850,000 acres in the Eagle Ford and Permian as well as Gulf of Mexico assets worth an estimated $22 billion, Elliott said.
“Our analysis indicates that the U.S. petroleum business has not been able to successfully contribute to shareholder value at BHP since it provides no meaningful diversification benefits to BHP as a whole,” the firm said.
BHP’s petroleum business and mining assets also lack synergies and the oil assets’ value is “obscured by bundling it with BHP's other assets.”
Elliott said BHP has underperformed “comparable mineral and petroleum companies” as an investment and should combine BHP Billiton Ltd. and BHP Billiton Plc shares under one stock.
Inside of BHP, the U.S. onshore acreage cannot compete with other divisions for capital, the firm said.
Since 2013, BHP has divested more than $7 billion in U.S. assets and reduced unit costs by 40%.
BHP said it has disclosed sufficient information for the market to fully value its petroleum business.
“There is no obvious discount in BHP Billiton’s trading multiples relative to the weighted average of relevant mining and oil and gas peers,” the company said. “BHP Billiton’s approach is to optimize the long-term value of the petroleum business through operating excellence.”
Elliott noted that BHP does not operate the majority of its conventional U.S. petroleum assets.
In addition, the company could unlock value by abandoning its dual-listed company (DLC) structure into a single company and through optimized use of its capital.
“BHP's DLC structure dates back to 2001 and was originally put in place in order to economically combine Plc and Limited without either company actually acquiring or merging with the other in the legal sense,” Elliott said.
In the past 16 years, however, Plc shares have traded at an average discount of 12.7% to Limited shares.
UPDATE: Australia Says Changes To BHP's Structure Must Fit National Interest
Elliott said the company has also missed out on M&A opportunities because it does not have a unified stock.
Royal Dutch Shell Plc (NYSE: RDS.A), a former DLC, was able to use its unified shares as part of its acquisition of BG Group. Shell paid $70 billion for BG, including 72% in stock.
Elliott estimated its plan would increase the value of BHP Ltd. shareholders holdings by 48.6% and BHP Plc stockholders by 51%.
The funds also said that BHP needs to better manage its money and buy back shares. BHP is expected to generate about $31 billion in excess cash flow in the next five years, assuming the current 50% payout ratio of net income continues.
“Unfortunately, BHP has previously used excess cash to make value-destructive acquisitions when it acquired certain Fayetteville assets and Petrohawk,” Elliott said.
BHP Billiton said a formulaic approach to buying back shares doesn’t take into account the cyclical nature of the resources industry.
“Since the formation of the DLC in 2001, we have returned to shareholders approximately $23 billion in buybacks of BHP Billiton Ltd. and BHP Billiton Plc shares, and approximately $56 billion in cash dividends,” the company said.
Elliott said that Australian tax credits have stranded about $9.7 billion and the company doesn’t have a clear path to using the credits without scrapping its DLC structure.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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