BHP looks to pull the plug on its petroleum assets

“Confirmation from BHP that it is in talks to merge its oil and gas assets with those of Woodside Petroleum, potentially in exchange for shares, marks the latest step in the mining giant’s shift away from fossil fuels, says AJ Bell Investment Director Russ Mould.

“BHP has already sold its shale oil and gas fields in the USA to BP for $10.5 billion and committed to withdrawing from the production of thermal coal. The putative talks with Woodside fit with chief executive Mike Henry’s announcement of a strategic review of the remaining oil and gas operations, which include two of BHP’s five biggest new projects, the Ruby oil and gas find in the Caribbean and the Atlantis oil field in the Gulf of Mexico.

“BHP has six main product areas. They are iron ore, copper, petroleum, coal (both metallurgical and energy), nickel and potash but on the basis of the company’s mix of adjusted operating profit from the first half iron ore and copper are the materials that really count.

“BHP wrote down the value of its oil and gas assets by $1.6 billion during the first half of its fiscal year and the company’s results this week (Tuesday) will reveal if there have been any further reassessments.

“Shareholder pressure is clearly building to sell or demerge the assets, but Mr Henry and the board have a tricky balancing act if they are to strike the right balance between shareholder satisfaction and shareholder value.

• BHP will wish to appease investors and environmental pressure groups by disposing of the assets
• Management may also be taking the view that now is a good time to sell, after a rebound in the oil price from 2020’s lows, as the global economy and travel begin to regain some sort of traction. The board will also want to avoid the risk that they are left with ‘stranded’ assets, should long-term demand for oil and gas tail off more quickly than anticipated, and take further hits to the valuation of those assets on its balance sheet.
• Some investors may nevertheless be worried that BHP is selling at a bad time, owing to the uncertain economic outlook, forecasts in some quarters of $100-a-barrel oil in 2022, and the substantial number of oil and gas assets that are potentially up for sale. There is therefore the danger that BHP destroys shareholder value by selling too cheaply, especially if oil and gas fields prove to have a longer lifespan that many expect or hope – oil still fulfils around one-third of total global energy requirements and gas one quarter, according to BP’s 2021 Statistical Review of World Energy. (Nuclear, hydroelectric and renewables generate barely one sixth between them). Whether BHP shareholders will be happy to see the company accept payment for the assets in Woodside shares is also open to debate, should that come to pass.

“For all of those doubts, management may simply feel that the pressure to act is too great and the alternatives – loss of value, loss of reputation and, in extremis, even loss of license to operate – are much bigger risks than missing out on any oil price recovery, especially as the oil and gas’ assets contribution to overall profitability is relative modest in the grand scheme of things (at least for the moment).

“BHP has six main product areas. They are iron ore, copper, petroleum, coal (both metallurgical and energy), nickel and potash but on the basis of the company’s mix of adjusted operating profit from the first half iron ore and copper are the materials that really count.

Source: Company accounts

“BHP’s July trading update in July outlined production volumes for the year, and also offered guidance for fiscal 2022. In 2021, petroleum beat expectations, energy coal missed and the rest met. For 2022, copper, nickel, iron ore, metallurgical coal and petroleum could all show output growth while thermal coal will show a clear decline.

Source: Company accounts, management guidance for 2021-22E

“BHP wrote down the value of its oil and gas assets by $1.6 billion during the first half of its fiscal year and the company’s results this week (Tuesday) will reveal if there have been any further reassessments.”

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