Big shareholders in BHP Billiton have welcomed Elliott Management’s campaign for change to the miner’s structure and petroleum division on the back of the US hedge fund’s latest visits to Australia.
Elliott representatives visited Sydney last week and Melbourne in recent weeks as part of an ongoing engagement campaign with BHP’s institutional investors.
Elliott is understood to have supported the appointment of Ken MacKenzie to the role of chairman of BHP last month but is continuing to discuss how best to unify BHP’s dual-listed structure and break up the company’s petroleum division.
Australian Foundation Investment Company (AFIC) and Wilson Asset Management (WAM) both confirmed they had met with Elliott and both believe the activist’s campaign has been helpful.
“I actually think they have been helpful in the sense that they have brought into the public focus the fact that BHP has actually underperformed over the last three, five to 10 years and nobody can deny that is true and management and the board aren’t denying that either,” said AFIC managing director Ross Barker. “We’ve got an open door. They [Elliott] have come in to see us.”
WAM portfolio manager Matthew Haupt said the debate generated by Elliott’s stance had been worthwhile. “I think it’s healthy to have constructive debate around best use of funds,” he said.
“I am supportive of those things, as long as they’re constructive, and Elliott has been.”
Elliott’s precise suggestions have changed over time, after Australian investors gave a lukewarm response to the hedge fund’s initial call for BHP’s US petroleum assets to be demerged and its Australian listing to be reduced to a CHESS depositary interest.
Elliott now believes BHP’s dual listing should be collapsed, with the Australian listing becoming the primary listing, and that an independent review of the petroleum division is warranted despite Elliott’s belief that a full or partial demerger of the petroleum division would be the best option.
Mr Barker said Melbourne-based AFIC, which holds more than $354 million worth of BHP’s Australian stock, was keen for BHP’s dual-listed structure to be unified.”Our view is that it should be unwound, it is an out of date structure, it is just a question of when and how to do it in a way that is in the best interests of shareholders,” he said.
“At the moment BHP are saying ‘We have got these billions of dollars of tax losses that we are gradually absorbing, we shouldn’t do it until after that has happened’, so our view on that would be do it as fast as you can but don’t torch value if there is something to be gained on the way.
“Our view is the head listing should be in Australia and it needs to be an Australian company, there is an incredible amount of franking even Elliott recognises that.”
Mr Barker said he was “not totally convinced” that an independent review of BHP’s petroleum division was necessary, but he was convinced that action was required with regard to the controversial US shale assets.
“Everybody is in heated agreement that the shale assets should be sold if you can get a good price for it, the sooner the better,” he said.
Mr Barker said there was no evidence to suggest BHP’s combination of minerals and petroleum assets was creating extra value through diversification, but said he was yet to be convinced on whether BHP should retain its conventional oil and gas assets.
“On the other petroleum assets I think we have got an open mind, we are available to be convinced in both directions,” he said.
Mr Barker said he would only support calls for more regular share buybacks if such a move did not jeopardise BHP’s gearing levels.
WAM invests in BHP through its WAM Leaders listed investment company, and Mr Haupt said the firm had met with Elliott on several occasions.
“You can’t really argue with their logic. The real issue comes down to onshore oil and gas. BHP haven’t had a great track record there, many would argue,” he said.
AFIC and WAM’s comments echo previous commentary from other BHP shareholders, including Aberdeen Asset Management, Argo Investments, BT Investment Management and Tribeca.
The comments come as BHP prepares to publish quarterly production numbers on Wednesday, while rival miner Rio Tinto is scheduled to publish its June quarter production report on Tuesday.
Shares in BHP and Rio have rallied by about 14 per cent over the past four weeks on the back of rising iron ore and coking coal prices, plus expectations that both companies will have the financial firepower to reward shareholders with strong dividends at their August financial results.
Analyst consensus suggests BHP’s underlying attributable profit for fiscal 2017 will be approximately $US7.45 billion; more than 500 per cent better than last year’s $US1.21 billion result.
The same analysts believe Rio’s half year underlying profit will rise by about 190 per cent to $US4.55 billion when it reports financial results on August 2.
Mr Haupt said he was looking for higher shareholder returns from the big miners going into the August results season. “I think they give some back this time. I think they’ve repaired the balance sheets,” he said.