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Sale signals success for Paul Singer’s activist efforts

BHP Billiton (ticker: BHP) announced its intent to exit its onshore U.S. oil and gas operations, after a long campaign by activist investor Paul Singer.

BHP reported fiscal year-end results today, showing attributable profit of nearly $5.9 billion, or $1.107 per share. In the conference call, BHP CEO Andrew Mackenzie announced that the company has determined that its onshore U.S. petroleum operations are non-core. With this in mind, the company is pursuing options to exit these assets.

According to BHP, its onshore U.S. petroleum operations will produce around 64 MMBOE in 2018, with a capital expenditure of $1.2 billion. The company’s ~838,000 net acres in the Eagle Ford, Permian, Haynesville and Fayetteville account for a combined 298 MMBOE of proved reserves.

Commodity decline meant buy-in was poorly timed

BHP jumped into U.S. shale in a big way in 2011, buying Petrohawk Energy and its Eagle Ford, Haynesville and Permian assets for US$15.1 billion and buying Chesapeake Energy’s Fayetteville unconventional gas assets for US$4.75 billion. However, the subsequent commodity price downturn led to billions in write-offs.

Mackenzie addressed this directly in his prepared remarks, saying “The shale acquisitions were poorly timed. We paid too much, and the rapid pace of early development was not optimal. When we entered the industry, our objective was to leverage our systems and scale and become an industry leader in shale and then replicate the opportunity around the world. However, following a global environment study about two years ago, it became apparent to us that the opportunities to replicate U.S. shale oil elsewhere did not exist.”

This situation came to a head when Paul Singer’s Elliott Management Corp. began pushing BHP to exit the onshore U.S. sector, among other goals, earlier this year. The fund recently raised its stake in BHP to 5% of the company’s UK-listed shares. While BHP initially resisted this push, the company has now shifted.

Multiple options available for divestiture

BHP reports that it is considering multiple options for exiting its onshore U.S. business, including a trade sale, asset swap, demerger or an IPO. However, the company emphasizes that retaining the assets is also a possibility if these efforts do not yield realized value. As Mackenzie put it, “We know and will know what the acreage is worth in our hand and are prepared to be patient.”

In the meantime, BHP will continue to improve its assets, including “larger completions, acreage consolidation, and midstream solution in the Permian, gas hedging in the Haynesville, and further well tests.”

BHP Looks to Sell its U.S. Shale Assets: We are Prepared to be Patient

Source: BHP Billiton

Mackenzie further elaborated on the plan for the onshore U.S. business in the Q&A portion of the call.

Q: If we look at the three scenarios that the onshore U.S. was being run on, just wondering if they’re still applicable or whether you are running at cash prior to sale? And if it was to be demergered, whether that would be the US market?

Andrew Mackenzie: Our preference would be, I think, to sell the businesses through a relatively small number or trade sales. But there is an execution risk around that. And so, in the interest of making sure we can do things relatively quickly, I don’t want to eliminate other ways in which we could exit these businesses, including things like demergers, IPOs, or vending into special vehicles, and so on. Look, we’ll look at everything in order to decide what is the right way through this.

But for now, we think that probably trade sales as we are — we would prefer to — what we think we have the best opportunity of restoring and maintaining value for our shareholder. I mean, yes, I can understand why you might say that we should kind of run it for cash. But one of the features of shale, which I think we’ve grown to like a bit less with time and see a bit more of a cost is that the investments demand that they are quite co-cyclical. You have to continue to invest to actually maintain the value of those businesses.

In this case, we’re very fortunate that we have investments that we can make, but we think our assets performed very well on the capital allocation framework. And as I said, they won’t just add profitability and value, they will add marketability to these assets. But as always, we will view this very, very regularly through the lens of the capitalized allocation framework. And because of the short-term nature of shale, we do that with a much greater frequency, right to the very top of the company.

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