Why Activist Elliott May Ultimately Fail in the Fight Against BHP

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Activist Investor Elliott Management has been going after BHP Billiton Ltd (NYSE: BHP), with billionaire Paul Singer leading that charge, for more than a month. Mr. Singer has a long list of accomplishments in investing and he is listed among the world’s top financiers and billionaires. That being said, some fights are just much harder to win than others.

Elliott’s activist fight against BHP can of course end up being a victory, but it seems more likely than not that Elliott’s fight against BHP will force far less real changes than the desired changes at BHP.

It is true that there are many areas that BHP Billiton could be attacked by shareholders. The company does operate globally and in endless operations. In the end, BHP’s widespread footprint may prove to be an insulating factor that keeps an activist from being able to force too much change here.

BHP is a dominant player around the globe in and endless number of materials and commodities — coal, copper, iron, nickel, petroleum, potash and just about anything else you want to mine out of the earth. Its geographies are in Australia, Southeast Asia, North Africa, North America, South America and in Europe.

BHP was also reportedly set to meet with members of Elliott on the sidelines of a conference this week. Also, Elliott’s original letter and presentation from April outline the full demands.

Paul Singer and his team now have roughly a 4.1% stake in BHP. This is a substantial bet for an activist when you consider that BHP’s market value is in excess of $90 billion just for its equity value. Still, it may be too small of a stake to swing such a large company with a unique structure.

Elliott has called for an independent review of the mining giant’s petroleum business while it pushes for more change at the company. Elliott Management previously wanted BHP end the company’s dual-listing for its equity, a move which could potentially make the company more approachable.

Perhaps the greatest effort by Elliott Management has been wanting for BHP to spin off or unload its U.S. oil and gas assets and to increase its returns to shareholders. These sound simple enough in activist terms. Forcing the former will be much harder than it sounds.

While a 4.1% stake  is quite impressive to the rest of us not in the three-comma club, the reality is that it is quite hard to influence what is far more than a $100 billion company when you combined the debt and equity for an enterprise value. Management of companies this large can often get other stakeholders to support their efforts. BHP has also so far rejected these efforts by Elliott.

Elliott Management wrote a letter to the BHP management suggesting that there is “extremely broad and deep-rooted support for pro-active steps to be taken” in order to reach an optimal value outcome for its petroleum business.

Andrew Mackenzie, CEO of BHP Billiton, has issued a fresh update on the company’s progress to grow long-term shareholder value. He spoke at the Bank of America Merrill Lynch Global Metals, Mining & Steel Conference, and he said:

At this conference one year ago, I outlined ambitious plans to improve returns and grow the value of BHP. Since that time, we have made consistent progress and we are confident that continued delivery of these plans, from our stronger base today, could grow the value of our company by up to 50 percent and almost double the return on capital… We have achieved a great deal over the past year but we are not standing still. Our roadmap today contains an enhanced set of opportunities that will see us prosper and grow value per share throughout the cycle, and in multiple price scenarios… Above all, we will remain disciplined, and drive consistent and transparent application of our capital allocation framework, which includes cash returns to shareholders. Our path is deliberate, with value and returns at the center of everything we do.

Mackenzie further outlined several key contributors to value creation, and these were shown in an SEC filing as follows:

  • Further cost reductions support a 10% value uplift.
  • Releasing more latent capacity across the portfolio for attractive returns with lower risk — a total $5 billion investment could add over 20% to current production at an average return of 75%.
  • Advancing the operating capability and capital productivity of its shale assets to lower drilling and completion costs and support returns on invested capital in excess of 30% on incremental investments.
  • Showing that all options to maximize the shale asset valuation,  including further appraisal, new technology and additional asset sales and swaps.
  • Major growth projects valued at up to $25 billion offer potential average returns of over 16% at consensus prices.
  • The Spence Growth Option will be considered by the Board in August 2017.
    Studies on the Olympic Dam expansion “are progressing well.”
  • A phased expansion of BHP’s Jansen potash project is expected to generate competitive returns with significant upside potential.
  • The Petroleum exploration program has an unrisked value of over $20 billion, with close to one-fourth being in low to medium risk prospects to be tested in the next two years.
  • Recent successes in the Gulf of Mexico and Trinidad and Tobago, and the successful Trion bid.
  • Technology programs to improve safety, lower costs and unlock resource with an unrisked value of up to $12 billion.
  • Attractive options from leaching optimization, mass mining methods, and precision extraction.

One effort has changed, with Elliott dropping its proposal for BHP to drop the dual listing in London and Sydney. While Elliott showed that BHP has invested $8 billion in petroleum exploration since 2002, and with little to almost no return, one unfortunate reality may simply be that BHP cannot cost-effectively break all of the assets out with the current energy market prices.  What if it created a major financial loss for the effort?

Reuters briefly outlined some pros and cons for the activist fight against BHP for its shale assets. They showed that BHP is not the only miner with assets that might not line up — rivals like Rio Tinto, Anglo American, and Glencore all were said to have parts of the company that do not mesh well together. Their view was that BHP’s petroleum business looks well suited to a spinoff, noting that the more BHP resists the more attractive its oil wells become.

Elliott has led many other efforts in recent years. Other large or well-known targets of Elliott Management have been Samsung, Mentor Graphics, Cognizant Technology, Qlik, Riverbed, Informatica, LifeLock and more.

While anything is possible, and while Elliott may keep pressing after BHP for quite some time (perhaps years), this seems to be a scenario where Elliott may have to ultimately demand less from BHP’s management. It just looks and feels like it will be very hard to swing management of a dually-listed mining giant with close to a $100 billion equity valuation and with highly diversified operations all over the world.

BHP Billiton’s ADS were last seen trading up 1.3% at $31.30 in late-Tuesday New York trading. Its 52-week trading range is $22.37 to $37.44. Its share price was above $60 per share as recently as 2014.