BHP Billiton to escalate defence from Elliott with Goldman’s help

BHP Billiton (ASX: BHP) (LON:BLT) is working with Goldman Sachs Group Inc. on a detailed response to activist investor Elliott Management, which yesterday issued a 10-page letter calling for major changes at the world’s largest mining company.

The bank’s involvement in the issue is nothing new, people with knowledge of the matter told Bloomberg. In fact, they said Goldman has been assisting BHP from the very first time the New York-based hedge fund manager approached the miner several months ago.

Analysts expect BHP to argue that a demerged petroleum business would need to fund offshore growth projects by raising debt, as there is little free cash flow being generated by the unit.

In its letter, Elliott told BHP it could unlock shareholder value by spinning off about $22 billion of its US oil assets and list them in New York. It also suggested changes to BHP’s corporate structure.

The Melbourne-based company replied the same day saying the costs and associated risks of the proposed overhaul would significantly outweigh any potential benefits.

As the miner now prepares a more elaborated response to Elliott, analysts expect it to argue that a demerged petroleum business would need to find funding for offshore growth projects, such as Mad Dog 2 and Trion, as currently there is little free cash flow being generated by the unit. Such backing would probably have to come from hiking the firm’s debt, rather than in the form of cash from other operations, Australian Financial Review reports.

The company may also contend that a demerged oil division won’t have the same ability to defer production until prices improve, as it has done it lately.

In the past year, BHP has been injecting money into its oil division. In October, BHP announced plans to invest as much as $5 billion in its petroleum business and also said it was considering additional investments of as much as $2.5 billion to expand existing projects and to possibly acquire new assets.

In February, the company revealed it had swung from loss to a $3.2 billion profit in the first half of the 2017 financial year. It also announced it was rewarding investors with an interim dividend of 40 US cents a share, higher than the 30 cents a share mandated by its policy.