BHP Billiton BLT.LN -0.29% is spinning off most of its nickel, aluminum and manganese assets as well as some coal mines, intending to create a more streamlined business. That will leave the Anglo-Australian miner focused on iron ore, copper, coal and its petroleum business.
Yet for all its supposed simplicity, does the remaining company’s portfolio really make sense?
Digging for metals or minerals and drilling for oil and gas are only superficially similar. The commodities go to different customers for different uses. They are priced and marketed differently.
Both oil and mining majors spend billions on large, complex projects that generate returns over decades. But BHP’s petroleum business is focused on onshore U.S. oil and gas; the company plans to increase production by some 50% over the next five years with the growth coming from shale, notes UBS.
It remains to be seen how successfully BHP can operate in this particular area. Shale’s success has largely been the preserve of smaller, more nimble exploration and production companies taking a trial-and-error approach at the field level, rather than the top-down management model favored by the majors.
Oil and gas will be a significant chunk of the slimmed-down BHP. Excluding the earnings of the departing assets, iron ore and petroleum would have accounted for 80% of BHP’s earnings before interest, taxes, depreciation and amortization in the year to June. The petroleum division alone would have been one-third.
BHP, which has a long history in energy, argues its oil-and-gas business will be a source of growth and stability, as China’s appetite wanes for steelmaking commodities such as iron ore and construction materials like copper.
BHP’s size means, if the miner wants to help supply the world’s growing need for energy, being in oil and gas makes sense. The new BHP is built around very large assets and end markets as much as around specific commodities.
One question for investors is whether they can buy mining plus energy more reasonably elsewhere. Valuing BHP’s oil-and-gas business in line with a highly rated, growing U.S. producer like EOG Resources, EOG -2.77% at about 5.7 times Ebitda, leaves the company’s mining business trading at about 6.6 times Sanford C. Bernstein’s forecast Ebitda at spot prices. That is a premium to peers.
Larger U.S. oil-and-gas companies, like ConocoPhillips, COP -0.82% generally trade at less than five times forecast 2015 Ebitda, according to FactSet, as do smaller producers like Hess HES -0.94% and Marathon Oil. MRO -1.47% While Rio Tinto, which generates the bulk of its earnings from iron ore, trades at about 5.1 times forecast Ebitda, on FactSet’s consensus figures, BHP Billiton is valued at close to six times forecast Ebitda for calendar 2015.
BHP Billiton may need to make a clearer case that mining and energy mix—so well, in fact, that the combination deserves a premium.