Tough decisions as BHP considers selling assets

BHP Billiton may be looking to offload assets, other than US shale, in the coming years.

BHP’s Mt Arthur coalmine in the Hunter Valley. Picture: Bob Barker.

BHP Billiton may be looking to offload assets, other than US shale, in the coming years, with new chairman Ken MacKenzie and chief Andrew Mackenzie recently flagging a tougher look at what stays and what goes in the big miner’s global portfolio.

Likely contenders for divestment include BHP’s stake in the North West Shelf LNG venture in Western Australia and thermal coal assets in the Hunter Valley and Colombia.

The company’s potash project in Canada and its nickel operations in Western Australia will also be in the firing line, although they have market and rehabilitation issues that could make ­realising value difficult.

When he made his first official appearance as chairman last month at BHP’s London annual general meeting, Ken MacKenzie listed the company’s global mine and petroleum portfolio as the second of five main areas he wanted the company to focus on.

First was the perennial industry priority of safety.

“The board and management review BHP’s portfolio and options for the future on an ongoing basis to make sure every asset earns its way in the portfolio against strict metrics focused on value and returns,” the chairman said. “There is significant work in progress in shaping the portfolio.”

He said this was most notably in US shale, where BHP in August finally admitted defeat on $US20 billion worth of 2011 acquisitions and said it planned to sell out.

But the whole portfolio, already simplified under Andrew Mackenzie’s spin-off of non-core assets into South32 in 2015, looks set for a more intense review.

When he fronted analysts in August, the chief executive said BHP’s annual review of assets would be done with a sharper pencil this year.

“Everything will get a good going over to make sure it’s fit for purpose for the longer term, and we do that every year,” Mr Mackenzie told analysts on the company’s 2016-17 earnings call.

“I expect this year’s process to be particularly rigorous.”

Still, there don’t appear to be any straightforward decisions.

The North West Shelf LNG plant at Karratha and associated offshore gasfields in which BHP has a one-sixth stake is operated by Woodside.

$26.82 BHP closed up 27¢

It has rapidly falling reserves and is set to become an infrastructure asset that treats other companies’ gas in coming years. This is at odds with BHP’s strategy of operating long-life, upstream (resource extraction rather than processing) assets.

But the NW Shelf was the biggest cash generator in BHP’s petroleum business last year, with underlying earnings before interest, tax, depreciation and amortisation at $US1.1bn.

While this could mean the stake, valued at $US1.6bn on BHP’s books, would fetch a good price, BHP will not want to forfeit the cash and also needs to take into account how this would change the dynamics of talks around what to do with the Exxon-operated offshore Scarborough gasfield.

BHP still has a 25 per cent stake (after selling 25 per cent to Woodside last year) in Scarborough and is in talks about processing the gas at Karratha.

Thermal coal also stands a good chance of being exited in the next couple of years.

The miner has two thermal coal assets — the Mt Arthur mine in NSW and a stake in the Cerrejon mine in Colombia, which is operated by a joint venture company on behalf of BHP, Glencore and Anglo American.

But there are complications at Mt Arthur, one of the nation’s most profitable coalmines, which is valued at $US1.1bn on the BHP books and delivered $US525m of EBITDA in 2016-17.

While it could be a good time to sell, given the $US2.7bn Rio Tinto got from Yancoal for its NSW thermal coal mines, BHP has tax credits associated with the project that can’t be transferred, meaning a sale may have to wait until more are used for BHP to realise value.

The tax benefits are one of the reasons BHP says hedge fund Elliott’s call to dissolve BHP’s dual-listed structure will cost too much.