BHP Billiton chief Andrew Mackenzie opens door to shale sale

BHP chief Andrew Mackenzie says the resources heavyweight would be prepared to sell its US shale business.

Andrew Mackenzie, chief executive of BHP Billiton. Picture: Claudia Baxter

BHP Billiton chief Andrew Mackenzie last night said the resources heavyweight would be prepared to sell the US shale business to someone who valued it higher than the company but that a spin-off of the business would be unlikely to achieve the best value.

Mr Mackenzie’s comments to a major mining conference in Barcelona provide the strongest indication yet that the resources giant might be preparing to give ground to New York hedge fund Elliott Management’s aggressive bid to break up the miner.

Elliott stepped up its attack on BHP just hours before Mr Mackenzie fronted the Bank of America Merrill Lynch Metals and Mining conference, with the fund declaring the miner was a tax-avoiding chronic underperformer and accusing management of misleading shareholders over the costs of unwinding the company’s dual-listed structure.

The $US33 billion ($44.5bn) activist fund, which has gained most traction on its plan to shed BHP’s US oil business, may already be sharpening BHP’s focus, despite Elliott’s complaints that it is not being listened to.

In a letter and presentation that accuses BHP management of being inflexible and defensive in the face of Elliott’s April 10 restructure plan, the fund has dropped its call for a primary London listing, which Scott Morrison has said would not be approved.

It is instead now proposing to replace the dual-listing with a wholly Australian incorporation that it claims would provide benefits for holders of the London shares (which Elliott holds) and Australian shares, which trade at a premium to the London shares.

Elliott publicly released a letter to directors containing a revised proposal it says can “halt chronic underperformance” through dissolving the dual-listed structure and potentially shedding the miner’s whole petroleum unit, one of BHP’s “four pillars”. Last month, Elliott said it wanted to spin off BHP’s US shale and conventional assets.

“Elliott has unpicked much of BHP’s rationale for rejecting its proposals, exposing flawed and misleading claims from BHP management on the supposed costs of proposed unification measures, designed to defend an entrenched ‘do nothing’ approach,” Elliott said in the accompanying letter, which was not signed by any individual from the fund.

The letter was released hours before Mr Mackenzie fronted the Barcelona conference yesterday and with Elliott investment chief James Smith due to meet privately with Mr Mackenzie in Spain today as part of a series of closed investor meetings.

BHP quickly responded to the accusation that it was misleading shareholders.

“We will review the materials in full and formally respond as appropriate,” it said in a statement.

“We are disappointed that the ­materials claim we have not been open to suggestions and that we have been misleading in our response. We reject both claims.”

Elliott claims BHP mislead shareholders by saying that dissolving the dual-listing could cost $US1.1bn. Elliott says it would actually cost $US200 million.

Elliott says that $US600m- $US800m of tax losses accumulated by the London company may never be used. And it says BHP’s contentious Singapore marketing hub structure, making up $US300m-$US500m of the cost of dual-listing removal, is unsustainable.

“This bespoke Singapore-based marketing structure by which BHP seeks to avoid tax is under heavy fire from the ATO, with BHP reportedly facing an ATO tax assessment of over $1bn,” Elliott said.

“Our assessment is that the tax benefits and the aggressive marketing margins which BHP was seeking in using this structure are unsustainable.”

In Barcelona, Mr Mackenzie did not mention Elliott or the grenade it lobbed just before his presentation. However, he spent the bulk of his presentation to investors — the first event since BHP rebranded this week — talking up the miner’s shareholder returns.

“Our road map today contains an enhanced set of opportunities that will see us prosper and grow value per share throughout the cycle, and in multiple price scenarios,” Mr Mackenzie said.

“Our path is deliberate, with value and returns at the centre of everything we do”.

But when asked why the company was holding on to the shale assets, he gave his frankest view to date on how unappealing the $US20bn acquisition, on which nearly another $US20bn has been spent developing for negligible free cash flow, now was to BHP.

“We used our really considerable geological knowledge that comes from our unique portfolio to do a global study of the whole shale industry, asking is this is a business that is likely to go global and that BHP wants to be a part of — and the answer is no,” Mr Mackenzie said, stressing the company’s goal of boosting its conventional oil assets.

“There are a lot of views out there on the future value of shale ... and if there is a natural owner out there that believes there is more upside that can be achieved within the shale business than we do, we will be more than happy to talk turkey with them.”

He said BHP has considered spinning out the assets but that it may not be the best way to get the maximum out of whatever value remains of the shale assets.

Natural owners of BHP’s shale oil and gas assets were different for different fields, meaning a break-up was seen as yielding more value than a sale of the shale business as a whole, he said.

In its release yesterday, Elliott said it had received “broad and deep-rooted support” from a group of investors holding “tens of billions” of dollars worth of shares for BHP to conduct an independent and open review of the whole petroleum business.

“There are a number of obvious possible solutions to unlock the latent value of BHP’s petroleum business, including a sale or demerger of the US petroleum business and a sale or ASX listing for the Australian and other remaining petroleum assets,” Elliott said.

“Our preferred approach is a full or partial demerger of the petroleum business, but in any event the logical next step to unlock optimal value from that business is the strategic review which shareholders have every right to expect.”

Elliott said BHP’s dual-listed rival Rio Tinto had outperformed BHP consistently over the past eight years and that since November 2008, BHP’s total shareholder returns “have been 128 per cent lower” than Rio’s.

Elliott neglected to say that this start date was Rio’s lowest point, when it had been crippled during the global financial crisis because of its debt-fuelled $US40bn purchase of Alcan, and that a 10-year comparison would be more favourable to BHP.

Rio chief Jean-Sebastien Jacques, speaking in Barcelona after Mr Mackenzie, did little to help his counterpart’s cause, putting up a slide saying Rio had returned $US2.7bn to shareholders last year, compared to BHP’s $US1.6bn.

He implied more returns were on the way this year.

“Remember, this was achieved at an average iron ore price of $US53.60 (a tonne before shipping costs),” Mr Jacques said.

“The average year-to-date has been $US74, so a price of $US42 for the rest of the year will give a similar outcome.”

Iron ore prices are currently about $US55, before shipping costs.