Singer's BHP gambit shines light on little-known oil giant

LONDON (Bloomberg) -- The usual suspects have planted their flags along the dusty byways of the Permian basin, declaring where they’ve staked claims. There are names like Royal Dutch Shell Plc, Anadarko Petroleum Corp., Pioneer Natural Resources Co. And, on signs fronting a barbed-wire fence, BHP Billiton Ltd.

For the world’s largest mining company, the heart of the U.S. shale boom in West Texas might seem to be strange territory, a very long way from the iron-ore deposits of Australia or the copper mines of Chile’s Atacama desert. But BHP actually has been in the oil business for years, with operations stretching from Texas to the North Sea. Its U.S. assets alone are so valuable that activist investor Paul Singer urged the company to spin them off -- a suggestion BHP rejected Monday, setting the stage for a tussle with the billionaire.

For CEO Andrew Mackenzie, a Scottish-born geologist who spent two decades at BP Plc and joined the miner in 2008, there’s a lot at stake. For one thing, oil is one of the two commodities where he sees the most potential. “Our preference is still, medium-to-long-term, to grow in oil and copper,” he told investors in February. And oil accounted for about 20% of BHP’s underlying profit in the six months ending in December.

Melbourne, Australia-based BHP is a big player in petroleum, setting it apart from such mining peers Rio Tinto Plc, Anglo American Plc and Vale SA. Right now, BHP is the fourth-largest producer in the U.S. Gulf of Mexico and the eighth-largest in U.S. shale fields. Singer’s Elliott Management Corp., which owns 4.1% of BHP, values the U.S. assets at $22 billion.

In the view of some analysts, that’s all a positive. “BHP is unique” and draws significant diversification benefits from having a large exploration and production arm, Houston-based energy investment bank Tudor, Pickering, Holt & Co. said in a note to clients, highlighting the bank’s bullish oil outlook.

Mad Dog Phase 2

The roadside signs in a desolate corner of Texas’s Loving County, near the border with New Mexico, are just two marks of BHP’s ambitions. They declare its rights to develop a 640-acre prospect called Amarillo By Morning and the 411.3-acre Dipping Dodson.

Mackenzie also is running bigger endeavors. In February, he approved $2.2 billion in spending on the Mad Dog Phase 2 project in the Gulf of Mexico where BHP and BP are partners. And in December, the miner outbid Big Oil competitors to team up with Mexico’s state-owned company to develop the Trion field, the first major offshore field in which Petroleos Mexicanos is working with a foreign outfit.

Six years ago, BHP boosted its volumes significantly with the acquisition of Petrohawk Energy for $15.1 billion, including debt. Last year, BHP pumped the equivalent of 650,000 bopd and natural gas -- about triple what Pioneer Natural Resources, a darling of U.S. shale investors, taps from its fields. In Australia, BHP is the second-largest oil producer, behind that country’s Woodside Petroleum Ltd. and ahead of international giants including Shell and Exxon Mobil Corp.

With BHP, Singer sees more growth potential for the U.S. petroleum arm if it’s separated into an entity listed in New York. In a 10-page public letter, Elliott Management said the value of the business was “being obscured by its continued inclusion” and “provides no meaningful diversification benefits.” Beyond that, Elliott said it would like to see the sale of other energy assets “on an ongoing basis.”

Singer has a history of trying to shake up the strategies of the companies in which he invests. He just needs to garner the support of other top shareholders, which include BlackRock Inc., Legal & General Group Plc and Capital Group Inc.

Michael Lynch of Strategic Energy & Economic Research in Winchester, Massachusetts, said the move may not make sense. “If you’re doing a good job making money in oil, there’s no reason to dispose of it,” he said.

BHP isn’t the first miner under pressure from activists to get out of oil, either through a spin off or an outright sale to a competitor. Copper giant Freeport-McMoRan Inc. last year sold much of its oil and gas businesses, in deals with Anadarko and a privately owned company worth $2.6 billion.

Although Freeport was also under pressure from an activist investor, in this case Carl Icahn, shareholders generally disliked the company’s big foray into oil, particularly two deals in 2012 to buy Plains Exploration & Production Co. and McMoRan Exploration Co. for roughly $20 billion, including debt.

For BHP, management has so far disagreed with separating U.S. oil assets from the larger company, saying it could “optimize the long-term value of the petroleum business through operating excellence.” The company also said there wasn’t an “obvious discount” between its valuation and a basket of oil and mining peers.

For all that, Singer “has provided a sensible set of suggestions,”  Hunter Hillcoat, mining analyst at Investec Securities Ltd., said in a note to clients. What he proposed is “certainly the start of some agitation that BHP will need to defend.”