BHP-Elliott Feud Sharpens -- WSJ

Mining company's oil-and-gas holdings are at center of quarrel with activist

LONDON -- The clash between BHP Billiton Ltd. and activist hedge fund Elliott Management Corp. is narrowing to one issue that could determine the future of the Anglo-Australian mining giant: Should BHP remain in the oil-and-gas business?

Elliott urged BHP to launch an independent review of its entire petroleum division last week, after calling for a broad restructuring of BHP last month that would include a spinoff of its U.S. petroleum business. It argues that BHP's cash would be better spent on its "world-beating" mining assets than its struggling American shale holdings and oil rigs in the Gulf of Mexico.

BHP has countered to Elliott and others that its knowledge of geology makes it better positioned to explore shale drilling than big oil companies, according to people familiar with the matter. Its executives have said it spends more time studying the rock formations and has been more productive than wildcatters at striking wells, which will pay off in coming years, the people said.

Neither side appears prepared to back down in a clash that will likely play out for months.

While BHP, the world's largest mining company by value, has conceded it made missteps investing billions in U.S. shale assets at the height of the natural-gas boom -- moves that have led to billions in write-downs -- it shows little sign of giving in to Elliott's demands. BHP Chief Executive Andrew Mackenzie has brushed off Elliott's proposals as little more than "financial engineering."

Elliott, which said it holds a 4.1% stake in BHP's London shares and is fresh off a high-profile win after helping to unseat Arconic Chief Executive Klaus Kleinfeld, is also sticking to its guns. The hedge fund, which manages nearly $33 billion, has valued a spinoff of BHP's U.S. oil business at $22 billion. It says BHP's management has adopted a "do-nothing approach" to its problems and called its responses to the hedge fund's proposals "dismissive" and "misleading."

Some investors say they are pleased BHP is being pressed to review its petroleum stake. Brenton Saunders, a portfolio manager at BHP investor BT Investment Management in Sydney, said shareholders have long held concerns about BHP's oil-and-gas assets. The emergence of activist investors calling for changes has encouraged healthy debate, and it is clear that BHP is taking it seriously, he said.

Other investors say BHP has been responsive to questions about the oil-and-gas business and are awaiting further details.

"We're engaged with BHP, and we're sure they are reviewing the situation, " said Fidelis Madavo, an executive at Public Investment Corp., South Africa's state-run pension fund and one of BHP's largest investors, with more than $1 billion in shares, according to FactSet. "We know the U.S. shale assets have been a problem," he said.

Though the company and the hedge fund have now been squabbling for nine months, "everything triangulates back to oil and gas," said Paul Gait, a Sanford C. Bernstein analyst who has argued that BHP should rid itself of its entire petroleum business, including its Australian operations.

One path Elliott could choose would be to try to take its plans directly to a future shareholder meeting if BHP isn't responsive, a person familiar with the fund's plans said. BHP's annual meeting in London is in October.

It is rare for mining companies to own substantial oil-and-gas operations. Glencore PLC owns oil assets in Equatorial Guinea and Chad, but they are small relative to the miner's other businesses.

BHP said its oil-and-gas business provides for a more diversified portfolio. Moody's Investors Service, which in May boosted BHP's ratings outlook to positive from stable, said it views the mining giant's oil-and-gas business as "strengthening its diversification relative to other global miners."

Mr. Mackenzie has said the oil-and-gas operations are a good fit with the company's strategy, noting that in the last five years they were its highest-margin operation, with average underlying earnings before interest, taxes and depreciation of 66%.

In a presentation at a conference in Barcelona last week ahead of a meeting with Elliott officials, Mr. Mackenzie, who previously worked for oil titan BP PLC, said the petroleum business is core to BHP's growth plans, but acknowledged that the company had overpaid to build a position in U.S. shale.

But some investors are growing restless, including Australian fund manager Tribeca Investment Partners, which recently met with Elliot and earlier this month called for BHP to divest its U.S. onshore oil-and-gas assets, a move it estimates would bring in about $10 billion that could be reinvested or returned to shareholders.

"We both see a lot of value that isn't being realized," said Tribeca analyst James Eginton.

David Benoit contributed to this article.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 26, 2017 02:47 ET (06:47 GMT)