BHP Group: Big moves and big dividends
About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 18 August 2021, 8:00 AM
- Sectors Covered:
- Mining, Energy
- Transformative developments are unfolding at BHP, with our biggest miner moving to divest its entire petroleum portfolio and removing its dual-listed share structure.
- Jettisoning petroleum is another in what is likely a series of portfolio moves that we expect inevitably will involve some larger M&A in future-facing metals.
- CEO Mike Henry is proving that he was hired for his vision, not just his efficiency/operational experience, with big changes continuing to unfold.
- All of this in addition to highest earnings since FY12 and a record final dividend.
Woodside-BHP Petroleum merger
BHP has agreed to merge its Petroleum business with Woodside (WPL), with the two sides agreeing to the merged entity being a 52/48 WPL/BHP Petroleum split.
Ultimately this is a call on where ESG pressures are headed, with BHP siding with the view that it was better off jettisoning its oil & gas assets near-valuation in order to boost its ESG profile and preserve its long-term cost of capital.
Current share prices implies the all-scrip transaction currently values BHP Petroleum at US$13.8bn, which sits at a 5% discount to our US$14.5bn valuation. We certainly see this as reasonable and ultimately ‘close enough’ in value terms.
BHP/WPL estimate that pre-tax synergies topping US$400mpa will be unlocked from the merger. While the entity will be a top 10 global E&P with US$4.7bnpa EBITDA (59% margin), 2P reserves of +2 billion boe (59% gas / 41% liquids) and 12% gearing. Conditions further in report, but expected to be completed Q2 2022.
What happens next to BHP?
The downside of divesting petroleum is the loss of high-margin oil & gas earnings and growth projects that represent 2/3 of BHP’s total growth profile.
Management attempted to answer analyst questions on the concentration of BHP earnings and material reduction in its growth profile, by pointing to its intent to push its existing assets harder (“innovation”), participate in more exploration, early-stage asset entry and yes…M&A.
We completely understand why BHP management would not want to announce that its ‘cheque book’ is open regarding M&A. But the key message that was hammered home in BHP’s result briefing was that the divestment leaves BHP nimble and agile with plenty of balance sheet capacity and room to move.
BHP’s overarching approach has traditionally focused on a commodity-strategy, with BHP clear that it loves future-facing commodities. This reaffirms that any new growth will remain in nickel, copper, iron ore, high quality met coal or potash.
Removing dual-listed structure
The other big news was BHP’s announced plans to unify its dual-listed structure. BHP will offer a 1-for-1 share (Ltd for Plc) to Plc shareholders. This approach was selected as it would see dividends unchanged for Plc shareholders.
Costs of unification have plummeted by US$1.2bn to US$400-$500m, with BHP finding a cost-lite path to squashing its dual listing. Conditions further in report.
FY21 result recap
BHP posted inline FY21 EBITDA of US$37,379m (vs US$37,144m MorgansF), on a group EBITDA margin of 61%, carried by iron ore and to a lesser extent copper. Underlying attributable NPAT of US$17,077m (US$17,674m) fell 3% short of our estimate but more importantly came in at the highest level since FY12.
Staggering FCF of US$19bn (vs US$17.5bn MorgansF).
This allowed BHP to flex its final dividend, coming in ahead of expectations, announcing a record final dividend of US$2.00ps (vs US$1.85ps MorgansF).
Post the result our target price increases to (login to view) and maintain HOLD recommendation on a TSR basis.
We expect short-term downward share price pressure once BHP goes ex-dividend which highlights now as an opportunity for more active investors to consider taking partial profits.
Key risks to our call relate to demand drivers for BHP’s key markets.
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