Mining and Heavy Industries

BHP to sell US shale business

Mining giant BHP will sell its US shale business for as much as $12.6 billion, after a sustained campaign from activist investor Elliott Associates.

BHP boss Andrew Mackenzie promised the sale on Tuesday, as the company delivered a US$6.73 billion underlying profit in FY17.

“Some of our assets and projects have not delivered the return we, or our shareholders, expect,” the chief executive said during his investor presentation.

“As I have said previously, the shale acquisitions were poorly timed, we paid too much, and the rapid pace of early development was not optimal,” he said.

“When we entered the industry our objective was to leverage our systems and scale, become an industry leader, and then replicate the opportunity around the world. However, following a global endowment study, it became apparent that opportunities to replicate US shale oil elsewhere did not exist.”

The announcement is a clear response to a strong and continued push from Elliott Associates over the past six months. Mackenzie and BHP chairman Jac Nasser said the focus of the business was now on cutting down debt and working to reward shareholders with maximised profits.

“Over the last five years, we have laid the foundations to significantly improve our return on capital and grow long-term shareholder value,” Nasser said, in his final results announcement as chairman before he retires at the end of the month.

“We have reduced unit costs by over 40% and achieved over US$12 billion in productivity gains. Our capital allocation framework provides flexibility at the bottom of the cycle and discipline on top. We have shifted our focus to low-cost, high-return latent capacity projects which has allowed us to reduce capital expenditure by over 70%.”

Mackenzie added: “We had a very strong financial year. Free cash flow was US$12.6 billion, or second highest on record. We used this cash to reduce net debt by nearly US$10 billion and return US$4.4 billion to shareholders.”

BHP handed down a US43c per share dividend.

“Productivity gains across our simpler portfolio of tier one assets increased our return on capital to 10%,” Mackenzie continued.

“This strong momentum will be carried into the 2018 financial year, with volume growth of 7% and further productivity gains expected. Our relentless focus on cash flow, capital discipline and value creation should allow us to significantly increase our return on capital by the 2022 financial year.”

The $US6.73bn in underlying profit was up almost five times on the US$1.2 billion reported in FY16, and came off the back of a 64% rise in underlying EBITDA, to US$20.3bn in FY17.

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