Singer's BHP gambit shines light on little-known oil giant

LONDON – The usual suspects have planted their flags along the dusty byways of the Permian Basin, declaring where they’ve staked claims. There are names like Royal Dutch Shell, Anadarko Petroleum, Pioneer Natural Resources. And, on signs fronting a barbed-wire fence, BHP Billiton.

For the world’s largest mining company, the heart of the US shale boom in West Texas might seem to be strange territory, a very long way from the iron-ore deposits of Australia or the copper mines of Chile’s Atacama desert. But BHP actually has been in the oil business for years, with operations stretching from Texas to the North Sea. Its US assets alone are so valuable that activist investor Paul Singer urged the company to spin them off – a suggestion BHP rejected Monday, setting the stage for a tussle with the billionaire.

For CEO Andrew Mackenzie, a Scottish-born geologist who spent two decades at BP and joined the miner in 2008, there’s a lot at stake. For one thing, oil is one of the two commodities where he sees the most potential. “Our preference is still, medium-to-long-term, to grow in oil and copper,” he told investors in February. And oil accounted for about 20% of BHP’s underlying profit in the six months ending in December.

Melbourne, Australia-based BHP is a big player in petroleum, setting it apart from such mining peers as Rio Tinto, Anglo American and Vale. Right now, BHP is the fourth-largest producer in the US Gulf of Mexico and the eighth-largest in US shale fields. Singer’s Elliott Management Corp, which owns 4.1% of BHP, values the US assets at $22-billion.

In the view of some analysts, that’s all a positive. “BHP is unique” and draws significant diversification benefits from having a large exploration and production arm, Houston-based energy investment bank Tudor, Pickering, Holt & Co said in a note to clients, highlighting the bank’s bullish oil outlook.

MAD DOG PHASE 2
The roadside signs in a desolate corner of Texas’s Loving County, near the border with New Mexico, are just two marks of BHP’s ambitions. They declare its rights to develop a 640-acre prospect called Amarillo By Morning and the 411.3-acre Dipping Dodson.

Mackenzie also is running bigger endeavours. In February, he approved $2.2-billion in spending on the Mad Dog Phase 2 project in the Gulf of Mexico where BHP and BP are partners. And in December, the miner outbid Big Oil competitors to team up with Mexico’s state-owned company to develop the Trion field, the first major offshore field in which Petroleos Mexicanos is working with a foreign outfit.

Six years ago, BHP boosted its volumes significantly with the acquisition of Petrohawk Energy for $15.1-billion, including debt. Last year, BHP pumped the equivalent of 650 000 bbl/d of oil and natural gas – about triple what Pioneer Natural Resources, a darling of US shale investors, taps from its fields. In Australia, BHP is the second-largest oil producer, behind that country’s Woodside Petroleum and ahead of international giants including Shell and Exxon Mobil.

With BHP, Singer sees more growth potential for the US petroleum arm if it’s separated into an entity listed in New York. In a 10-page public letter, Elliott Management said the value of the business was “being obscured by its continued inclusion” and “provides no meaningful diversification benefits.” Beyond that, Elliott said it would like to see the sale of other energy assets “on an ongoing basis".

Singer has a history of trying to shake up the strategies of the companies in which he invests. He just needs to garner the support of other top shareholders, which include BlackRock, Legal & General Group and Capital Group.

Michael Lynch of Strategic Energy & Economic Research in Winchester, Massachusetts, said the move may not make sense. “If you’re doing a good job making money in oil, there’s no reason to dispose of it,” he said.

BHP dismissed the advantages of separating US oil assets from the larger company, saying management could “optimise the long-term value of the petroleum business through operating excellence.” The company also said there wasn’t an “obvious discount” between its valuation and a basket of oil and mining peers.

For all that, Singer “has provided a sensible set of suggestions,” Hunter Hillcoat, mining analyst at Investec Securities, said in a note to clients. What he proposed is “certainly the start of some agitation that BHP will need to defend”.