BHP will sell its US shale business for as much as US$10 billion, after a sustained campaign from activist investor Elliott Associates.
The mining giant outlined its annual result on Tuesday, delivering a US$6.73 billion underlying profit in FY17, up almost five times on the US$1.2 billion reported in FY16. The profit came off the back of a 64% rise in underlying EBITDA, to US$20.3bn in FY17.
“We had a very strong financial year,” BHP chief executive Andrew Mackenzie said.
“Free cash flow was US$12.6 billion, or second highest on record. We used this cash to reduce net debt by nearly US$10 billion and return US$4.4 billion to shareholders.”
BHP reduced its debt from US$26.1 billion to US$16.3 billion during the period, and handed down a US43c per share dividend.
A solid program of continued cost cutting and limited capital expenditure, coupled with positive outlooks for iron ore and coal, will allow BHP to continue rewarding shareholders and driving down debt, the company said.
In a volatile iron ore market, BHP’s high-quality ores will allow it to remain versatile.
“Based on our view that the steel market in China will remain tight, thus supporting mill margins, we expect ores at the higher end of the grade spectrum to perform well for at least the remainder of the calendar year,” the miner said.
“Spreads to ore at the lower end of the grade spectrum are likely to stay relatively wide. These circumstances would suit the grades of fines and lump product of [BHP’s WA iron ore business], which remains a world-class, high margin operation.
“That is amplified by our ability to consistently secure value for our Newman, MAC, Jimblebar and Yandi products.”
As for metallurgical coal, BHP said rising utilisation rates in Chinese blast furnaces in response to supply side reforms to the steel industry, have underpinned demand for coals at the higher end of the quality spectrum.
“Additionally, with the potential for voluntary supply restraint by major Chinese met coal producers, ongoing supply issues for PMV, Chinese port inventories remaining low, high land borne logistics costs in China, and the potential for an accelerated rate of capacity closures in calendar year 2018, it is possible that met coal prices can sustain above long run marginal cost for some time,” the miner added.
The story was also positive for energy coal.
“Energy coal prices have benefited from robust demand from China, steady demand from other North Asian markets and supply disruptions in key export jurisdictions,” BHP reflected.
“Coal power generation in China increased 8.5% year-on-year in the second half of FY17, with strong cooling and industrial demand co-occurring with a slowdown in hydro generation.
“Chinese imports have expanded by 20 per cent year-on-year to meet this demand, with domestic mines constrained.”
Aside from a solid financial and bulk commodity outlook, the big news of BHP’s annual report was the promised sale of its US shale business.
“Some of our assets and projects have not delivered the return we, or our shareholders, expect,” Mackenzie said during his investor presentation.
“As I have said previously, the shale acquisitions were poorly timed, we paid too much, and the rapid pace of early development was not optimal,” he said.
“When we entered the industry our objective was to leverage our systems and scale, become an industry leader, and then replicate the opportunity around the world. However, following a global endowment study, it became apparent that opportunities to replicate US shale oil elsewhere did not exist.”
The announcement is a clear response to a strong and continued push from Elliott Associates over the past six months.
Mackenzie and BHP chairman Jac Nasser said the focus of the business was now on cutting down debt and working to reward shareholders with maximised profits.
“Over the last five years, we have laid the foundations to significantly improve our return on capital and grow long-term shareholder value,” Nasser said, in his final results announcement as chairman before he retires at the end of the month.
“We have reduced unit costs by over 40% and achieved over US$12 billion in productivity gains. Our capital allocation framework provides flexibility at the bottom of the cycle and discipline on top. We have shifted our focus to low-cost, high-return latent capacity projects which has allowed us to reduce capital expenditure by over 70%.”
“Productivity gains across our simpler portfolio of tier one assets increased our return on capital to 10%,” Mackenzie added.
“This strong momentum will be carried into the 2018 financial year, with volume growth of 7% and further productivity gains expected. Our relentless focus on cash flow, capital discipline and value creation should allow us to significantly increase our return on capital by the 2022 financial year.”