Hedge fund urges BHP Billiton to spin off US oil business

Activist hedge fund Elliott Advisors on Monday accused BHP Billiton of failing to deliver “optimal” value for shareholders, and called on the world’s largest mining group to spin off its US oil business.

Elliott also proposed that BHP scrap its dual corporate structure — under which the group operates through separately listed entities in London and Sydney — and instead have one company with headquarters in Australia in order to take full advantage of tax breaks.

The US-based fund manager, which revealed it had acquired an economic interest in 4.1 per cent of BHP’s shares, said it believed its plan could “unlock value and improve capital returns to shareholders”.

“We expect that a full and open review of our plan by management in the near term would be welcomed by an overwhelming majority of BHP’s owners,” added Elliott.

But BHP, which is looking for a new chairman to succeed former Ford boss Jacques Nasser, said it believed the “costs and associated risks of Elliott’s proposal would significantly outweigh any potential benefits”.

The group added there was “no obvious discount” in its share price relative to peers.

“BHP Billiton will consider further its detailed response to the proposal and will make a further announcement in due course,” it said.

Andrew Mackenzie, BHP’s chief executive, has consistently defended the dual structure, arguing that having shares separately listed in London and Sydney gives the group better access to capital markets.

Shares in BHP rose 2.2 per cent in London on Monday to £13.16. The stock is almost 50 per cent below its all-time peak.

BHP underwent a major restructuring in 2015 when it demerged aluminium and other unwanted operations into a new entity called South32, but Elliott said this had not gone far enough.

Some analysts think BHP’s oil business is undervalued by investors, in spite of its output of 660,000 barrels of oil equivalent a day contributing about one-third of the group’s earnings before interest, tax, depreciation and amortisation over the past five years.

This business, which includes onshore shale assets and fields in the Gulf of Mexico, sets BHP apart from rival mining companies including Anglo American and Glencore, which do not own significant assets producing oil.

“We see the demerger of BHP’s Gulf of Mexico assets in combination with the US onshore petroleum assets as providing a standalone US petroleum business with consistent cash flow to fund its own further expansion,” said Elliott.

BHP’s two-company structure is a legacy of its 2001 merger between Australia’s BHP and the UK’s Billiton.

BHP Billiton Limited is listed in Sydney, while BHP Billiton plc is listed in London, and together they operate as a combined group that has its global headquarters in Melbourne.

Elliott said creating a single BHP company with headquarters in Melbourne — and listings in London and Sydney — would be beneficial, partly because of the way dividends are taxed in Australia.

Australian shareholders are able to offset tax owed on dividends against tax already paid by the company through so-called franking credits.

BHP Billiton Limited currently transfers a dividend to BHP Billiton plc to allow both entities to maintain equal payouts to shareholders, but this transaction has not been eligible for Australia’s franking credits.

Elliott also argues that BHP can improve returns by using any excess cash flow for share buybacks rather than acquisitions.