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BHP in talks on US shale sales after activist campaign

CEO Andrew Mackenzie says the moves on shale and potash aren’t the result of shareholder pressure.

BHP Billiton is in talks with potential buyers of its US shale assets — acquired in a contentious $20 billion deals spree in 2011 — and will delay a move into potash after months of public skirmishes with activist investors led by Paul Singer’s Elliott Management.

The strategy pull-back by the world’s top miner comes after new chairman Ken MacKenzie, who officially starts his job next month, met more than a hundred investors in recent weeks in Australia, the US and the UK in the wake of the campaign by some shareholders calling for reform.

“We’re talking to many parties and we’re hopeful” of completing a small number of trade sales to divest the onshore oil and gas division, Chief Executive Officer Andrew Mackenzie told Bloomberg Television Tuesday in an interview, adding that the moves on shale and potash aren’t the result of shareholder pressure. “We have been moving in this direction for some time” on shale, he said.

Missteps on strategy by BHP’s leadership, including in the shale unit, have destroyed about $40 billion in value, according to New York-based Elliott, which launched the public campaign seeking a range of reforms in April. BHP’s 2011 shale deals had been too costly, poorly timed and the eighth-largest producer in US shale didn’t deliver the expected returns, CEO Mackenzie said on an analyst call.

BHP likely concluded the shale and Jansen assets were “not going to generate the returns that is going to make the grade,” said Macquarie Wealth Management Division Director Martin Lakos. “It’s most likely the Elliott activity has accelerated the shale sales process.”

Elliott last month joined skeptics including Sanford C. Bernstein and Argo Investments in raising concerns the $13 billion Jansen project in Canada could risk depressing already low potash prices. Deutsche Bank AG last week called on BHP to mothball the operation, citing potential low returns. It’ll likely be two to three years before the potash market is in a position that would allow BHP to reconsider advancing the project, Mackenzie said.

BHP advanced 1.1% to A$25.98 in Sydney trading, as competitor Rio Tinto Group advanced 1%.

Discussions among BHP shareholders have been dominated by concerns over shale and potash, according to Craig Evans, a portfolio manager at Tribeca Investments, which holds the producer’s shares. Tribeca and other investors have also pressed the case with BHP directly, he said.

“Elliott put the first balls in motion on this in calling them to task,” Evans said. “It’s no coincidence that we’re talking about those issues now.”

Investors including AMP Capital, Schroders, Escala Partners and Sydney-based Tribeca have added to criticism of BHP, or offered support for some of Elliott’s proposals, in recent weeks. Elliott didn’t immediately respond to a request for comment on BHP’s decisions on shale and potash.

BHP will also study a potential demerger or initial public offering of the shale unit, the Melbourne-based producer said Tuesday in a presentation. “We are keeping the other options there so we can proceed with a reasonable amount of pace. For now, we think a trade sale would work best,” Mackenzie said in the interview.

The US onshore assets were free-cash flow positive in fiscal 2017, BHP said in a statement Tuesday, as it reported full-year earnings jumped five-fold on higher commodity prices. A sale of the shale unit could fetch about $8 billion to $10 billion, and may attract buyers including Anadarko Petroleum, Macquarie said in a July 24 note. Anadarko didn’t immediately respond to an emailed request for comment.

BHP is going to get better value than they would have two years ago after the surge in crude oil price from last year’s 12-year low, David Lennox, an analyst at Fat Prophets, said on Bloomberg TV. The company has “probably picked an opportune time because we’ve seen the oil price come up from a bottom,” he said.

© 2017 Bloomberg L.P

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