Brett Paton joins chorus of anti-BHP Billiton criticism

A former adviser to BHP Billiton has launched an extraordinary attack on the strategy of the resources giant.

Veteran investment banker Brett Paton.

A former adviser to BHP Billiton and doyen of the Australian equity capital markets scene has launched an extraordinary attack on the strategy of the resources giant, including questioning its board appointment of Business Council of Australia president Grant King.

Brett Paton, who is now the chairman of Escala — a boutique wealth management firm that ­advises some of the richest people in the country — has written to Escala’s clients urging them to review criticism of the company by Elliott Management and Tribeca Investment Partners and take ­action to protect their ­investment.

In a campaign to remove BHP’s dual listing and demerge US shale assets, made public in April, Elliott has described BHP as a tax-avoiding, chronic under­performer and accused management of misleading shareholders.

Tribeca joined the fray early last month with similar criticisms.

Now Mr Paton urges Escala clients to address five urgent questions to the company relating to its strategy and board renewal processes, including identifying former Amcor chief executive Ken MacKenzie as the best successor to retiring BHP chairman Jac Nasser.

“Consider carefully who Jacques Nasser and the board propose as the new chairman. Given Ken MacKenzie, a current board member, ran a very successful global company with strong credentials in investing, capital management and occupational health and safety, this author hopes he is well considered in the interests of shareholders,’’ Mr Paton writes in the letter, a copy of which has been obtained by The Australian.

It is understood other fund managers back Mr Paton’s view that Mr MacKenzie would be the best candidate to succeed Mr Nasser, ahead of other internal candidates Lindsay Maxsted and Malcolm Broomhead, the chairmen of Westpac and Orica respectively.

Mr Paton spent 23 years at UBS as vice-chairman in Australia, where he advised BHP on ­numerous occasions.

He then spent five years as vice-chairman Australia of Citi’s institutional clients group before retiring and joining Escala as chairman in 2015.

Last year Escala teamed up with one of the nation’s top advisers to institutional investors, proxy advisory firm Ownership Matters, to help high-net-worth clients take more informed positions on their listed company ­investments.

The new partners have staged two breakfast forums with clients where the BHP issues were discussed, but it is understood Ownership Matters is formulating its public position on the issue separately.

Mr Paton’s letter specifically recommends Escala clients vote against Mr King’s election at BHP’s upcoming annual general meeting.

It questions Mr King’s record at Origin Energy, noting Origin’s return on invested capital averaged less than 4 per cent before impairments over the past six years.

“During this period Origin has written down about $5.5 billion of assets, including the $600 million acquisition of Poseidon (offshore Browse Basin) — an acquisition Origin made while its balance sheet was already heavily stretched, with no obvious synergies or economic underpinning. This is at a time when east coast onshore gas shortages were emerging as a pressing issue,’’ the letter says.

Mr Paton also questions why the Origin balance sheet was allowed to reach a stage where it carried debt of $17bn in 2015, including project finance for the APLNG development in Queensland, and why Origin rejected a takeover bid from British oil and gas giant BG in May 2008.

“Management continually denied the need to raise capital, in the end being forced into a highly dilutive sale of Contact Energy and a rushed $2.5bn equity raising in 2015. This has still left the balance sheet materially over-geared in the eyes of most in the market,’’ the letter says.

When BHP announced Mr King’s board appointment in February, Mr Nasser said the new ­director would bring “strategic thinking, an immense intellect and his ability to apply a long-term view”, as well as oil and gas experience.

Mr Paton backs Elliott’s call for an independent review of BHP’s petroleum business.

If the oil and gas unit had not been part of BHP, it would not have had the capacity to spend $US20bn on US shale oil and gas ground in 2011 and nearly as much again developing them for little return, he says.

BHP has said it is well placed to reap value from petroleum, although it admits it spent too much acquiring shale assets and then spent too much trying to develop them.

Escala asks the board to buy back more shares to get value out of franking credits and questions a $10m rebranding that drops the “Billiton” name (although not yet from the official company title).

On buybacks, BHP has said shareholders have communicated their preference for paying down debt over returns, which the company has been doing.

The marketing spend is important at a time when distrust of corporations is rising, BHP says, with many inside the company pointing to Scott Morrison’s bank levy as an example of what can happen when community trust is lost.

Mr Paton also urges the board not to invest in assets “not directly connected to existing core competencies’’, including Potash.

BHP is considering a $US4.7bn investment in the Jansen potash project in Saskatchewan, Canada, which Mr Mackenzie last month said was set to go to the board in the next 12 months.

It would be the biggest single investment decision to go before the board in its history.

“BHP should recognise it has world class mineral resources, capable of selective expansion to meet demand,” Mr Paton says in the letter.

“It should stick to the knitting, not flirt with diversification.”