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BHP Billiton bows to activism

Full-year numbers for the miner showed the influence of activist Elliott
August 23, 2017

Before BHP Billiton (BLT) published its full-year results, analysts had been expecting an average adjusted pre-tax profit of $11.8bn (£9.19bn). In the end, the commodities giant missed the mark by 7 per cent, but the shares still increased in value by 3 per cent.

IC TIP: Buy at 1407p

How do we square this optimism, given the high-profile scrutiny over BHP’s earnings (or recent lack thereof)? The first source of hope can be found in the balance sheet. Net debt dropped 37 per cent year on year to just $16.3bn, a trajectory reinforced by a fresh commitment to buy back another $2.5bn of euro- and dollar-denominated bonds. One benefit of using spare cash to retire debt rather than equity – as rival Rio Tinto (RIO) seems committed to – is that BHP can avoid accusations of poorly timed share purchases “made at inflated market prices”.

Those words are taken from one of many criticisms levelled against BHP by activist shareholder Elliott Management, whose influence was laced throughout these preliminary figures. The headline-grabber was BHP’s determination – per Elliott – that the onshore US oil and gas division is now “non-core”. The resources group is now “actively pursuing options to exit these assets for value”, although no indication was given on whether this might involve a South32 (S32) style spin-off, or a straight sale to a shale peer. Until this is decided, BHP will ramp up drilling activity in the second half of 2017, and “assess mid-stream solutions” to boost the business’s value, marketability and profitability.

BHP management cannot be seen to take all of its cues from a 5 per cent shareholder. Riding high from a year in which the post-tax underlying return on capital employed hit 10 per cent, $6.9bn has been earmarked for capital and exploration expenditure in 2018, up from $5.2bn last year. Two developments will come into sharper focus: the BP-led Mad Dog Phase 2 project in the Gulf of Mexico, and a $2.5bn extension to the Spence copper mine in Chile.

On average, analysts who follow the stock expect pre-tax profit of $10.6bn and adjusted EPS of $1.17 in the 12 months to June 2018, up from $11bn and $1.23 in FY2017.

BHP BILLITON (BLT)   
ORD PRICE:1,407pMARKET VALUE:£81.3bn
TOUCH:1,406.5-1,407p12-MONTH HIGH:1,519pLOW: 957p
DIVIDEND YIELD:4.6%PE RATIO:16
NET ASSET VALUE:1,076¢*NET DEBT:26%
Year to    TurnoverPre-taxEarnings Dividend
30 Jun ($bn) profit ($bn)per share (¢) per share (¢)
201363.1019.70211116
201456.8021.70260121
201544.608.0635.9124
201630.91-7.26-12030
201738.2910.3211183
% change+24--+177
Ex-div:07 Sep   
Payment:26 Sep   
£1=$1.28. *Includes UK and Australian-listed shares.