BHP Billiton to Sell Assets It Never Should Have Purchased

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In 2011, mining giant BHP Billiton Ltd. (NYSE: BHP) coughed up $20 billion to acquire onshore U.S. energy assets primarily in the Haynesville and Eagle Ford shale plays. Elliott Management and chief Paul Singer say that BHP has destroyed about $40 billion in the company’s value as a result of bad strategy and mismanagement.

The company reported quarterly results late Monday and, among other things, said that it had determined that its U.S. shale operations were not core to its business and that it was actively looking at options to leave the business. Like oil and gas development, the company’s iron ore, copper and other mining operations require big capital expenditures, and that has been a big drag on profits and dividends.

At the same time that it announced that it is looking to sell its shale assets, BHP boosted in its final 2017 dividend by a factor of three, from $0.14 per share annually to $0.43, for the fourth quarter. On an annual basis the full-year dividend payout will total $0.83 per share.

In 2011, BHP paid $15 billion to acquire Petrohawk Energy and $4.75 billion to acquire nearly 500,000 leased acres in the Fayetteville shale play from Chesapeake Energy Corp. (NYSE: CHK). The price premium BHP paid for Petrohawk was about 60%. In 2015, BHP took an after-tax charge of $2 billion related to its natural gas assets in the Hawkville field of the Eagle Ford shale play.

Macquarie Wealth Management analyst Martin Lakos told Bloomberg TV that he thinks that BHP’s shale assets are worth about $8 billion to $10 billion, and he emphasized that the planned divestment is not a fire sale.

In hindsight, BHP overpaid for Petrohawk, and the 2015 write-down cut the value of the assets even further. In our view, Macquarie’s estimate is the upper end of what BHP can expect, and that’s only true as long as the market for the company’s other minerals remains strong. Once commodity prices fall again, what the shale assets will be worth to BHP is whatever a buyer is willing to pay.

BHP stock traded up about 1.5% in the noon hour on Tuesday, at $41.50 in a 52-week range of $29.30 to $42.00. The 12-month consensus price target is $36.97.