Shale sale will end a painful chapter for BHP
The $US10.8 billion BHP will receive for its US shale assets is a fair price and ends a painful chapter for the world's top miner, says Morningstar.
Mentioned: BHP Group Ltd (BHP)
The $US10.8 billion BHP will receive for its US shale assets is a fair price and ends a painful chapter for the world's top miner, says Morningstar.
Senior mining analyst Mathew Hodge has maintained a fair value estimate of $24.50 a share for no-moat-rated BHP following the sale of its shale assets last Friday to BP and a unit of Merit Energy Co. At 3pm, dual-listed BHP was trading at $34 on the ASX - a 38 per cent premium to its FVE.
"We have mixed feelings about the sale but on balance feel the price is fair," Hodge said in an updated note following the sale.
"BHP overpaid when it purchased the US onshore assets for about US$20 billion. This high installed capital base means BHP generated poor returns and EBIT losses on shale.
"However, we think there has been meaningful improvements in technology and the efficiency of developing news wells. Retention of the shale assets would offer BHP an alternative investment option, and in general we think greater investment choices bring a mild benefit."
The sale ends BHP's seven-year foray into US shale
The sale may help appease investors, including Elliott Management Corp, who for the past 18 months have been pressing the miner to shed under-performing assets and boost returns.
BHP bought the assets - located in the Permian Basin, a swath of west Texas and New Mexico and now the fastest growing major oil region - in 2011 and spent a further $20 billion developing them, but suffered as gas and oil prices collapsed, triggering vast writedowns.
The sale process began last August, and CEO Andrew Mackenzie says the proceeds will be handed back to shareholders.
For London-based energy giant BP, the benefit is twofold. They gain a position in the Permian and take another step in moving on from the 2010 Deepwater Horizon disaster in the Gulf of Mexico - for which they are still paying off $65 billion in fines and clean-up costs.
BHP is yet to determine exactly what form the shareholder return will take, said Hodge, who will adjust his forecast once that is set.
"There are several options but each has pros and cons for different shareholders," he said. "BHP could pay a special dividend. This would be beneficial to Australian shareholders as the company has ample credits to fully frank the dividend.
"However, a dividend is unlikely to be tax-effective for foreign shareholders ineligible to benefit from franking. A capital return may be preferred by foreign shareholders, but in that case, BHP would not be using its franking credits to benefit Australian shareholders."
Hodge says an off-market buyback of Australian-listed shares would allow the franking credits to be distributed to the shareholders in Australia who benefit most from them while allowing the company to buy back shares below the prevailing price.
"This could be coupled with a proportional buyback of UK-listed shares, which trade at a discount to the Australian-listed shares to maintain the current 60:40 ratio between the two."
While BHP has a sustainable competitive advantage in iron ore, Hodge notes demand for commodities will weaken as the global economy cools.
"The China booM will never recur, and commodities are the beginning of a long, slow secular decline.
"Investors interested in gaining exposure to specific commodities would be better off investing in pure plays than BHP."
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Lex Hall is a Morningstar content editor, based in Sydney.
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