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What Caused BHP to Underperform in 1H17

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BHP stock’s highs and lows

BHP Billiton’s (BHP) stock price lost 2% in the second quarter of 2017 and 0.5% in the first half of the year. Investors should, however, note that the stock has risen each day since the end of June as of July 12, 2018. It has gained a total of 8.2% in the first seven trading days in July, bringing its YTD (year-to-date) gains to 7.6%.

While the deterioration in the sentiment toward seaborne iron ore prices pressured BHP’s price in 1H17, a rebound in the prices of the steel-making commodity helped the stock soar in July.

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Elliott’s proposal

Activist hedge fund Elliott Management has made a case to BHP’s management to make the following three changes:

  • collapse its dual-listing structure
  • spin off its US petroleum division and monetize its value
  • return more capital to the shareholders

BHP responded by saying that it regularly reviews opportunities to create shareholder value. BHP Chairman Jacques Nasser conceded that the timing of the 2011 acquisition of US shale assets was “way off.”

However, the pressure on BHP is mounting to follow up on these changes to create shareholder value. Aberdeen Asset Management, the second-biggest shareholder in BHP, also conceded that dissolving BHP’s dual-listing structure with a primary Australian listing “would be preferable to the present structure if it could be done for a reasonable price.”

On June 15, 2017, BHP named Ken MacKenzie as its new chairman. MacKenzie will take over Nasser’s duties in September 2017. Analysts are expecting this change to bring a shift in strategy, as the new chairman might agree to the proposed restructuring. Elliot has urged the new chairman to “significantly upgrade” the company’s board of directors.

Shale gas assets

BHP is now planning to divest its Fayetteville Shale gas assets, which it acquired for ~$5 billion in 2011. These assets have been written down many times since then.

According to Reuters, these assets had a book value of $919 million at the end of 2016. Energy peers (XLE) ConocoPhillips (COP), ExxonMobil (XOM), Chevron (CVX), and Pioneer Natural Resources (PXD) have also been negatively impacted by weaker energy prices.

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