August 22, 2017 / 7:28 AM / a year ago

BHP uses commodity rally to fortify position

HONG KONG (Reuters Breakingviews) - BHP is using a commodity rally to fortify its financial position and placate critics. The Anglo-Australian miner swung to an annual net profit of $5.9 billion - missing forecasts but still improving on last year’s $6.4 billion loss. Plans to exit a troubled shale business and hold off on investing in fertiliser mining chime with some demands from Elliott, the activist hedge fund. That compromise, plus a continued focus on financial strength, looks sensible.

BHP Billiton Chief Executive Andrew Mackenzie speaks at a round table meeting with journalists in Tokyo, Japan June 5, 2017. REUTERS/Kim Kyung-Hoon

Graphic: BHP has underperformed competitor Rio Tinto over the past five years:

Tuesday’s results do not give the troublemakers everything they want - and indeed, people familiar with the matter reject the idea the moves are a result of Elliott’s nagging. But it goes some way to addressing the latter’s wish list.

Elliott argued that all of BHP’s U.S. oil business, including both onshore shale and traditional offshore oil, should be spun off. It also looked askance at BHP’s mooted plans to invest over $4 billion reactivating a potash plant, to enter a fertiliser market that looks oversupplied. The fund demanded a tighter focus on shareholder returns and suggested it might be worth unifying BHP’s dual-listing structure.

BHP is now seeking to sell U.S. onshore assets, ideally through a series of trade sales, while keeping the conventional oil business. That seems wise: a Breakingviews analysis in April found a full-blown spinoff would not have unlocked much value.

Meanwhile, BHP has pushed back the investment timetable for the controversial Jansen potash mine. At the same time it has slashed capital expenditure by 30 percent, and will hold spending on capex and exploration below $8 billion for the next three years. The days of wild dealmaking in peripheral business lines appear at an end as cost-cutting new Chairman Ken MacKenzie prepares to take the helm.

Elliott isn’t getting everything it wants, at least not yet. Instead of buying back shares, for example, BHP spent $9.8 billion paying down debt, and aims for further reductions. But that could follow, once net debt is at a targeted $10 to $15 billion. And if Chinese demand falters – as BHP and others expect it to do - global commodity prices might fall back too. In which case investors would appreciate a reinforced balance sheet.


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