London, United Kingdom – In the heyday of the US shale boom, it only made sense for commodity majors to diversify into attractive Permian assets. With oil prices sharply lower since 2014, BHP Billiton’s (NYSE:BHP) ill-timed investments in the space are heading for the exit. The company said it now considered its struggling US shale assets as non-core operations, and plans to sell the business.
The mining giant reported a return to profitability in the latest fiscal year ended June as metal prices surged in the past year due to sustained demand for global construction and manufacturing. Net income reversed to $5.89 billion, up from a loss of $6.39 billion last year.
While the non-core shale and petroleum unit generates around 23 percent of annual revenues, its profitability has been under severe pressure, with almost half of its value written off because of the oil rout. Iron ore is BHP’s largest segment, comprising just under half of the company’s earnings.
The much-awaited strategy shift comes after activist billionaire Paul Singer’s Elliott Management Corp. swept in with a 5 percent shareholding this summer and called for an independent review of the oil business. While BHP executives would prefer to actively overhaul, market and sell the shale assets in a number of ways to extract value, Elliott has pushed for a bolder spinoff plan through an IPO.
Analysts at Goldman Sachs, in a recent note to clients pegged the value of the U.S. onshore shale assets at $8.4. They estimated the Eagle Ford asset to be valued at $5.8 billion, with the assets in the Permian basin of Texas valued at $2.4 billion. BHP also has assets in the shale-rich Haynesville and Fayetteville regions of Arkansas and Louisiana.
The company has not yet announced an outside review of the troubled oil business. Elliott Management has called for BHP to simplify its complex dual-listed structure into a single listed entity in Sydney.
With the healthy reversal in profit and cash flow, BHP today bumped its full year dividend payout to 83 cents a share. It also announced a $2.5 billion repurchase plan for its US dollar and euro denominated bonds. BHP shares rose 4% in London.