BHP steers path to activist demands

Significant strategic shifts announced in BHP Billiton's full-year report may have a back-seat driver, named Elliott.

Shale goes “non-core”

BHP privately suggested on Tuesday morning that it arrived at these courses of action of its own volition. But there's a remarkable confluence between a list of the activist investors’ demands, dealt out in a campaign since April, and BHP’s plans. The group is now engaged in a "patient" pursuit of options for an exit from U.S. shale oil drilling activities, it says, having classified Onshore U.S. assets as “non-core”. BHP has long acknowledged that it paid too much when it entered the shale business and that it would look to get out of it when the time is right. Apparently, that time has come. And it’s nothing to do with the fact that the Elliott revealed just days ago that it had raised its stake again from 4.1% to 5.04%, gaining the right, under English law, to requisition a general meeting and circulate a resolution for a shareholder vote. The possibility that tactics, attitude and rhetoric from the notorious fund could take a more aggressive turn, backed with increased capacity to cause real trouble has concentrated the minds of top management, including recently appointed chairman Ken Mackenzie. He has been on BHP’s board since September 2016 and officially ascends to the job as Jac Nasser steps down on 1st September. Nasser is absent apart from a few mentions from results documents. Is it much of a stretch to see a thread from the appointment of Mackenzie and external corporate pressure on BHP? He made his name by cleanly gutting and turning around a $14bn Australian food and packaging group, doubling returns to 20% within a couple of years.

Mackenzie’s choice

The appearance of ponderous, though self-determined, decision-making at BHP is maintained to an extent by a tweak of the group’s views on the potash market. Elliott dubbed a project to develop production of the salt at a cost of up to $14bn “disastrous”.  Addressing the Jansen plant, located in Saskatchewan, Canada, in some detail, Mackenzie stressed “cash flow and capital discipline”, noting that whilst “timing is uncertain…we have no doubt that the world will need new potash supply.” Ergo, the project remains live, but it will no longer be a capital-intensive priority.

The group continues to avoid a sense of urgency by swinging to a huge net profit from a substantial net loss in the year to the end of June. And, as per BHP’s giant mining rivals, the momentum of intense operational and capital efficiency and grinding deleveraging will continue to feed through for years to come. BHP hasn’t yet caved on the pivotal thirst among all shareholders, not just Elliott, for increased disbursement of the cash generated by these drives to slim down and recalibrate production. The Australian miner has, however, finessed a clear path to do so over the medium term. Investors are likely to use achievement of the group’s targeted net debt level of $10bn-$15bn as a marker.

Shareholders have signalled little opposition to the new plans on Tuesday, lifting shares to a rise approaching 4%, taking the stock’s advance since April, when Elliott burst on to the scene, to about 14%, easily the best gain by a major London mining stock since the spring. The stock can comfortably be expected to rise further into the year end and beyond. Faced with the choice of eliminating a discount between its shares and fellow mining gargantuans organically, or more proactively, under the threat of corporate and possible boardroom disruption, BHP Billiton has chosen studied compliance.

• Technically speaking, it’s not easy for a heavy mining stock to arrest an almost five-year decline—BHP’s main London listing has faced a significant setback this year following a definitive rebound in January 2016
• Despite that, I suspect few technical analysts would disagree that the weekly chart below remains constructive and indicative of an extension of the current uptrend, even if the stock may continue to struggle with the strong residual downdraft (or falling trend line) that links all the way back to December 2010 and April 2011
• An initial aggressive ascent within a rising channel from late January 2016’s 11-year lows faltered at the bisection of 1514p resistance and said declining trend line in January this year
• There’s no guarantee that trend line resistance has been neutralised—how the stock fares this week will give an indication. It was promisingly flirting with the topside of the line at the time or writing, whilst its Relative Strength Index (red sub-chart) was also pointing higher with headroom before an overbought indication
• Should the stock signal that its rise is indeed underpinned by sustaining above the trend, it will confront formidable resistance at 1514p, the price of reliable support between 2009-2014 and which has already stymied three attempts to reconquer it since
• An earlier sign of possible success might come by the establishment of new support above c.1420p, a level at which the stock has persistently peaked since December, aside from the one higher attempt on 1514p in January
• In the event of failure there, BHP would then need to avoid a decline past the weekly high in mid-July, 1361.p, in order to avoid a potential re-test of 2017’s 1114p lows

WEEKLY CHART: BHP BILLITON (LSE)

Source: Thomson Reuters and City Index