Arguably the biggest move for shareholders of Melbourne-based mining company BHP [BHP] has been the decision to end its dual listing structure by exiting the FTSE 100 and moving its primary shares listing to Australia.
This unified corporate structure, according to chief executive Mike Henry would “make BHP more efficient and agile, better positioning the company for continued performance and growth.”
If it receives shareholder approval the move will go ahead in the first half of 2022.
The group also announced plans to divest its oil and gas assets such as the Atlantis oil field in the Gulf of Mexico and merge with Australia’s Woodside Petroleum. The merger, BHP noted, would create a top 10 energy company of which it would own 48%.
It also announced an investment of $5.7bn in the Jansen Stage 1 potash project in Canada. Executives at the company believe demand for potash — mainly used in fertiliser — ‘is underpinned by a growing global population and the requirement for more productive farming with a lower environmental footprint’, according to a statement on the company’s website in August.
“Our Petroleum and Jansen decisions will increase the weighting of BHP’s remaining portfolio towards the future-facing commodities that are most positively leveraged towards population growth, rising living standards, electrification and decarbonisation” - chief executive Mike Henry
Henry added: “Our Petroleum and Jansen decisions will increase the weighting of BHP’s remaining portfolio towards the future-facing commodities that are most positively leveraged towards population growth, rising living standards, electrification and decarbonisation.”
The announcements came as BHP released full-year results on 17 August, showing an 80% lift in operating profit to $25.9bn and a record final dividend of $2 per share.
Despite this, the BHP share price dropped from $69.83 at the close on 17 August to $65.47 at close on 18 August. It now sits at $65.23 at the close on 24 August.
Were the restructuring announcements to blame for the fall in the iron ore price which had been fundamental in the BHP 2020 share price surge?
Its share price rose from $48.11 at the close on 30 October 2020 to $80.83 at the close on 10 May, predominantly driven by surging demand from China for iron ore and copper to help drive the electric vehicle (EV) growth and supply chain squeezes raising prices.
AJ Bell investment director Russ Mould said that the corporate restructure would “mean products which track the FTSE 100 and funds with investment policies barring them from buying shares with their main listing overseas will have to exit their shareholding”.
However, the Woodside move marked, Mould said, the latest step in the mining giant’s shift away from fossil fuels: “BHP has already sold its shale oil and gas fields in the US to BP for $10.5bn and committed to withdrawing from the production of thermal coal.” Mould added that “ BHP will wish to appease investors and environmental pressure groups by disposing of the assets.” Further, the company may have found this is a good time to sell after a rebound in the oil price, the AJ Bell director said.
“There is the danger [however] that BHP destroys shareholder value by selling too cheaply, especially if oil and gas fields prove to have a longer lifespan that many expect or hope” - AJ Bell investment director Russ Mould
“There is the danger [however] that BHP destroys shareholder value by selling too cheaply, especially if oil and gas fields prove to have a longer lifespan that many expect or hope.” Oil still accounts for a third of the world’s energy consumption and gas another quarter, Mould noted.
Indeed, according to a recent report in The Motley Fool, analysts at Morgans ‘expect the Woodside merger to remove growth opportunities rather than create them’.
There are also concerns over the future direction of iron prices and demand.
Zaven Boyrazian, writing in The Motley Fool, noted: ‘As encouraging as BHP’s latest financial results were, they may not be sustainable. The mining company has been a significant beneficiary of rising iron ore prices. However, now that China has introduced government-mandated reduction targets the metal’s price is expected to fall before the end of 2021. Since the firm is heavily reliant on income from the sale of iron ore, this is bad news for anyone expecting it to maintain its current growth rate.’
“As encouraging as BHP’s latest financial results were, they may not be sustainable. The mining company has been a significant beneficiary of rising iron ore prices. However, now that China has introduced government-mandated reduction targets the metal’s price is expected to fall before the end of 2021” - Zaven Boyrazian
However, over the long term he expects the BHP share price to continue to rise, helped by its diversification into potash and reduced operating costs as a result of the single structure.
JP Morgan analysts believe BHP shareholders should also hold on and enjoy a $55bn cumulative dividend pay-out over the next three years.
‘Relatively low operating leverage, strong balance sheet and minimal growth capex imply dividends are defendable even at materially lower prices,’ the US bank states. ‘Furthermore, ESG considerations will likely mean corporate strategy will err on the side of caution around growth & M&A (here) further limiting potential drains on excess capital.’
There is caution around the volatility of Chinese domestic iron ore production, the commodity’s price and whether now is a good time to be divesting from oil and potentially dismaying UK based shareholders.
But overall, as pointed out by Mould of AJ Bell, BHP at least has a “clear strategy”. He adds: “It is now focusing on future-proofed commodities which are part of the transition away from fossil fuels or in other words being part of the solution rather than part of the problem.”
There could still be some upside for investors to find in BHP.