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Activist investor Elliot Management achieves another victory, pressurising BHP Billiton into planning a disposal of its US shale business

Nicholas Hyett, equity analyst at Hargreaves Lansdown said “the move is likely to be seen as a capitulation by the board, which had previously argued that the division formed a core part of the group’s operations”

US shale derricks
“However,” he added, “while that volte face may attract headlines, management’s strategy elsewhere seems to be going smoothly and delivering results”

So, activist investor Elliot Management looks to have achieved another victory, pressurising BHP Billiton plc (LON:BLT) into planning a disposal of its diversification into the US shale and gas business, a move which seems to have overshadowed the global miner’s latest full year results.

In April, New York-based Elliott - which last week revealed it has hiked its holding in BHP Billiton to 5% - urged the FTSE 100-listed firm to consider some radical moves to unlock shareholder value.

READ: Elliott Management raises stake in BHP Billiton to 5%, stepping up the pressure for strategic change

In a letter sent to BHP Billiton directors, Elliott suggested the firm should scrap its dual-corporate, Anglo-Australian structure, demerge its oil business, and rejig its capital return policy.

The hedge fund firm had to backtrack on its proposal for BHP Billiton to have its main listing in London following opposition from the Australian government, but since then has repeated its calls for the firm to overhaul its petroleum business.

With today’s numbers, BHP Billiton said it has “determined that our Onshore US assets are non-core and we are actively pursuing options to exit these assets for value.”

Nicholas Hyett, equity analyst at Hargreaves Lansdown said “the move is likely to be seen as a capitulation by the board, which had previously argued that the division formed a core part of the group’s operations.”

“However,” he added, “while that volte face may attract headlines, management’s strategy elsewhere seems to be going smoothly and delivering results.”

READ: BHP Billiton up as it commits to exit its underperforming US shale business and posts jump in annual profit

Hyett pointed out: “The focus on cost control at BHP’s already very low cost assets means cash generation is soaring now commodity prices have turned.

“Net debt is tumbling, and as that falls towards more sustainable levels it will free up cash for other uses. “

The analyst added: “Next year a significant portion of the spare cash is going on increased capital spending, particularly in Petroleum and expanding existing mines.  But since the group has already proven itself willing to return more than the 50% of earnings its dividend policy dictates, returns to shareholders could benefit as well. “

Though Hyett concluded that, as ever, that “assumes stable commodity prices, and if the last two years have taught us anything it’s the risks of making that kind of assumption.”

Some scepticism about just how sustainable commodity prices are

Echoing this caveat, Rebecca O'Keeffe, head of investment at Interactive Investor commented: "With iron ore prices up over 50% in less than 50 days and copper prices hitting levels not seen since 2014, miners have seen a resurgence in their share prices as metal market mania takes hold.

“While the Trump Trade was credited with the boom and then bust of commodity prices over the past year, the reality is that metal prices are all about what happens in China.”

O’Keefe continued: “China’s Belt and Road initiative is attempting to recreate the old silk route by land and sea and involves the construction of ports, pipelines, railways and other infrastructure, designed to connect China to countries throughout Asia and beyond.

“This massive project has caused a surge in demand for metals at the same time at which China is curbing its own low-quality production and moving to import better quality iron ore for its steelmakers.”

However, she concluded: “Whether this rally will continue is subject to much debate and there is some scepticism about just how sustainable prices are, having risen so far, so fast – but investors who have bought into the Chinese story over recent weeks are doing very nicely for the moment."

Shares jump though numbers mixed

In early afternoon trading, BHP Billiton was the second biggest FTSE 100 gainer, up over 3%, or 41.5p at 1,407.5p, even though the full year numbers were mixed for other analysts.

In a note to clients, analysts at Morgan Stanley said: “EBITDA missed our forecasts and net income missed consensus too. Dividend was in-line with consensus but below us despite much lower net debt than forecast.”

However, they added: “Capex guidance is at the higher end of our expectation but the decision to exit US Onshore oil assets will help to improve earnings quality.”

And analysts at RBC Capital noted that although BHP Billiton’s operating cash flow came in better than they had expected the group’s earnings per share number and dividend payout was lighter than they forecast, albeit in line with consensus.

But they concluded: “The decision to sell the US onshore business is a prudent decision and we think the market will likely take this as a slight positive.”

Quick facts: BHP Group PLC

Price: 1670.2 GBX

LSE:BHP
Market: LSE
Market Cap: £84.46 billion
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