BHP faces a ‘growth conundrum’ that may require it to further split up its global businesses

BHP successfully offloaded its petroleum division this month and now analysts say it should consider hiving off other units.

BHP CEO Mike Henry.

BHP faces a “growth conundrum’’ that may require it to further split up its global businesses.

That view from Citi analysts this week comes just days after BHP successfully offloaded its petroleum division to Woodside in a $63bn deal.

Woodside shareholders this month overwhelmingly approved the merger, which will nearly double the company’s production and propel it into the top 10 oil and gas producers in the world.

Citi now believes that BHP should consider a further carve up, hiving off its metals business and its bulks division, which includes coal and iron ore.

“Is it time to take the next big step to split the company further?’’ analysts Paul McTaggart and two of his colleagues asked in a client note.

BHP chief executive Mike Henry

“CEO Mike Henry has now unwound the DLC (dual listed company) structure and demerged the Petroleum business, both major initiatives for BHP.

“That said, we think the latter will also focus attention on BHP’s growth conundrum. Both Iron Ore and Met Coal are mature assets where demand is peaking given China demographics and decarbonisation pressures on the steel industry.’’

They contend that index weightings would be easier to manage under such a scenario.

“We think this would likely be seen as an advantage to domestic fund managers struggling with BHP’s current weightings. We believe M&A (merger and acquisition) is not likely in either iron ore or coal, so M&A within a smaller BHP Metals business would have an ability to make a difference; and Metals would have the cash flow to support large scale M&A,’’ they write.

While Citi says Mr Henry has “surpassed market expectations’’ with his execution of the Woodside deal, he must now tackled the challenge of driving growth at BHP, which delivered a 42 per cent spike in net profit last year to $11.3bn.

“We think meaningful production growth will likely prove elusive given a +US$40bn EBITDA in FY22/23. The challenge for BHP’s management will be to arrest and turnaround what has been a steady market de-rating of the shares over the last decade. And this has not been a BHP specific problem - growth is proving a challenge for all the major mining houses,’’ the note says.

“Compounding the growth challenge for BHP is our view that both iron ore and met coal will face longer term challenges. We believe that seaborne demand for iron ore and metallurgical coal will be impacted as pressure rises on the steel industry to decarbonise.’’

Citi expects that iron ore demand will peak in 2028 and then remain relatively flat through to 2040 as earning “inevitably decline’’.

It has forecast that metallurgical coal demand will peak in 2026.

Despite these challenged, Citi rates BHP as a “buy’’ with a price target of $50.