Chalk one up to the activists.
BHP Billiton, the world’s biggest mining company by stock market value, has said it has decided to offload its US shale oil operations and is “actively” looking at exit options.
The announcement represents a victory for Elliott Advisors, the hard-driving activist fund that for months has been campaigning for a shake-up at BHP Billiton, recently raising its stake in the company known as ‘The Big Australian’ to 5%.
Among its demands was a call for BHP to sell its US shale operations on the grounds that there were little synergies with the company’s other mining assets. It also claimed that the assets were a drag on BHP’s share price.
When Elliott began waging its campaign, BHP rejected the call, arguing that the US shale business remained core to its strategy and had “potential to create significant long term vale at high returns”.
It added that the business was worth more to shareholders than it would be if it were spun off as a separate company and said offloading it would deprive shareholders of any upside to the US shale industry.
Now, though, BHP Billiton is telling a different story although Andrew Mackenzie, the chief executive, insisted investors would need to be patient.
Make no mistake, this is an immensely significant victory.
While activist investors are not new, Elliott’s campaign against BHP Billiton raised eyebrows due to the sheer size of the company it was targeting and the size of the investment it had to make to get BHP’s attention.
BHP was also able to count on the support of the Australian government as it sought to repel Elliott and it is perhaps significant that BHP has only given way on one of the activist’s demands.
The US firm’s demand that it simplify its current company structure under which it has separate London and Sydney-listed entities, which so angered Australia’s politicians, remains off the table.
Yet many chairmen and chief executives, when confronted by activists, will now tread a little more warily.
BHP Billiton is one of the biggest operators in the US shale industry.
It entered the business in 2011 with the acquisition of Petrohawk for $12bn and, in total, is reckoned to have invested some $20bn in its shale operations.
The investments were made a time when the oil price was trading at north of $100 a barrel but, as the oil price has subsequently nose-dived, it has been forced to write an estimated $13bn from the value of the assets.
Jac Nasser, who will step down as chairman at the end of the month, recently told a seminar of investors: “If you had to turn the clock back, and if we knew what we knew today, we wouldn’t do it (buy the shale assets), of course we wouldn’t do it, but go back and put yourself in our position at that time.
“We bought exactly what we thought we were buying, but the timing was way off.”
BHP’s decision to sell its US shale assets have overshadowed some otherwise strong numbers.
Underlying full year profits of $6.7bn, up from $1.2bn last time, were slightly short of expectations.
But investors have been cheered by news that the company, following several years of cost-cutting and careful stewardship of its assets, brought down its debt by $10bn during the last year.
This also enabled it to generate free cash flow of $12.6bn, its second-highest annual level ever and better than it achieved in most of the global mining industry’s boom years, enabling BHP to more than double its dividend.
Investors will be hoping there will be more of the latter to come once the US shale assets are sold.