BHP Billiton plc (LON:BLT) is mulling a proposal by Elliott Management to overhaul its petroleum business after the activist investor stepped up pressure for a strategic review.
Elliott, which owns a 4.1% stake in BHP’s UK-listed division, has urged the oil giant to conduct an independent review its petroleum business as the shares have consistently underperformed.
"We and other shareholders are concerned that despite the clear signs that the market is receptive to a new strategy for BHP, current management seems intent on quieting the enthusiasm for BHP to dig deeper in tackling the obvious shareholder value enhancement opportunities which exist," Elliott wrote in a letter to BHP’s directors.
In the letter, the investor said it had held discussions with a number of shareholders who supported restructuring of the petroleum arm. Elliott suggested a full or partial demerger of the business but asked for an in-depth independent review of the petroleum operations first.
Elliott argued there would be benefits to collapsing BHP’s dual-listed structure, spinning off its US oil and gas assets and improving capital returns.
It also backtracked on its proposal for BHP to have its main listing in London following opposition from the Australian government. Elliott said it believes a Sydney listing will enable the company to take greater advantage of tax benefits in Australia.
BHP said it would review the proposals and dismissed claims that it wasn’t open to suggestions.
BHP CEO addresses investors on plans at conference
Shortly following the release of the letter today, chief executive, Andrew Mackenzie, addressed investors at a conference in Barcelona on the group's plans to boost long-term shareholder value.
These include further cost cuts to support a 10% increase in its value and a US$5bn investment in latent capacity across the portfolio, which Mackenzie said could add more than 20% to current production at an average return of 75%.
Mackenzie added that the petroleum exploration programme has an unrisked value of more than US$20bn and cited recent successes in the Gulf of Mexico, Trinidad and Tobago, that give BHP "the confidence to accelerate our counter-cyclical investment".
"At this conference one year ago, I outlined ambitious plans to improve returns and grow the value of BHP," he said at the Bank of America Merrill Lynch Global Metals, Mining & Steel Conference.
"Since that time, we have made consistent progress and we are confident that continued delivery of these plans, from our stronger base today, could grow the value of our company by up to 5% and almost double the return on capital."
He said BHP currently has major growth projects valued at up to US$25bn, offering potential average returns of more than 16% at consensus prices. BHP also has technology programmes in place to improve safety, lower costs and unlock resource with an unrisked value of up to US$12bn.
Elliott says BHP's stock has underperformed
Elliott said BHP’s shares have underperformed its nearest peer, Rio Tinto, and the S&P/ASX 200 and the FTSE 100 indexes, over the past two to eight years.
The investor blamed BHP’s US$23bn venture into the US onshore oil and gas sector, the US$8bn spent on petroleum exploration with no apparent value created and about US$9bn poured into share buybacks at inflated prices.
Elliott has a reputation for assertive tactics. The chief executive of Arconic Inc., Klaus Kleinfeld, was ousted last month after Elliott pushed the company for several months to give him the boot from the aerospace and automotive parts maker.
Elliott has also made a series of hostile demands to Alliance Trust plc over the years. Alliance has responded by beginning structural upheaval of its business last year and ousting Katherine Garrett-Cox as chief executive in 2015.