BHP Billiton (BHP) has mounted a strong defense of its current business strategy of cutting costs, boosting productivity from the asset base it retains after spinning off around $US14 billion in unwanted assets.
At a ‘Capital Day’ presentation yesterday, the world’s biggest miner said it expects to lock in a minimum of $US3.5 billion in annualised productivity gains by the end of the 2016-17 financial year, with more than US$2.3 billion of that to come from cash cost savings.
CEO Andrew Mackenzie, said in a statement: “We are confident that our productivity drive will be accelerated by the demerger proposal we announced in August. A simpler portfolio, focused on our 19 core assets, will retain an optimal level of diversification while generating even stronger growth and margins.”
The company listed the core assets as being: Western Australia Iron Ore; Samarco iron ore in Brazil; Queensland Coal; NSW Energy Coal; Cerrejón coal in Columbia; Escondida copper in Chile; Olympic Dam; Pampa Norte copper in Chile; Antamina copper in Peru; Onshore US oil and gas; Shenzi, Mad Dog, Atlantis oil in the Gulf of Mexico; Angostura oil and gas in Trinidad and Tobago; North West Shelf; Bass Strait; Pyrenees, Macedon oil and gas in Australia; and the Jansen potash project in Canada.
Mr McKenzie said the company expected production from this core portfolio to grow 23% per cent over the two years to the end of the 2015 financial year as the Company completes high-return, brownfield projects and embeds productivity-led volume gains.
“BHP Billiton remains on track to meet all 2015 financial year production guidance,” he said.
BHP YTD – BHP maintains efficiency mantra
But in his statement there was no hint for shareholders about capital management moves, other than the promise of higher returns.
But he did reveal the company would try to cut its investment in US shale oil and gas, as many other companies have started doing (Sumitomo and Shell are two recent examples).
“We have initiated marketing our Fayetteville acreage,” Mr Mackenzie said. “We will only divest the field if it maximizes value for shareholders.”
BHP spent $US20 billion in 2011 on US shale assets getting its foothold in Arkansas, Louisiana and Texas. In 2012 BHP took a $US2.84 billion charge on the Fayetteville assets because of lower gas prices.
Mr Mckenzie went on to give some examples of cost cutting across parts of this portfolio.
He said the company has cut unit costs across all its mineral businesses and expects further reductions across the core portfolio.
"Unit costs at Western Australia Iron Ore fell 12 per cent in the second half of the 2014 financial year and a 25 per cent reduction is expected in the medium term.
"Production costs in the Copper business have also fallen despite grade decline. Escondida unit costs declined by 22 per cent in the last two years and we forecast another five per cent reduction in the 2015 financial year.
"At Queensland Coal, a 24 per cent reduction in operating costs has re-established the business as a leader in its industry. We expect to reduce unit costs by a further 10 per cent, to below US$90 per tonne, in the 2015 financial year as we continue to increase throughput from our installed infrastructure.
"In Petroleum, forensic benchmarking of every component of our Onshore US drilling program has significantly improved capital productivity. Drilling costs in the Black Hawk fell 16 per cent in the 2014 financial year. Onshore US operating costs are also expected to improve with a 10 per cent reduction forecast in the 2015 financial year,” Mr McKenzie told the conference.
"Our longstanding capital management framework defines four priorities for cash flow: to retain a solid A credit rating to maintain a strong balance sheet through the cycle; to at least maintain or grow our progressive base dividend in every reporting period; to invest selectively in high-return opportunities through the cycle; and to return excess capital to shareholders in the most efficient way
“We see our capital management strategy as a precondition to maximising shareholder value. It has allowed us to invest through the cycle and grow our dividend at an average annual rate of 17 per cent over the last decade without interruption.
“Our core portfolio includes a suite of development options that are expected to generate an average rate of return of over 20 per cent. As our capital efficiency improves we will be able to create more value for less investment. We believe we can significantly reduce annual capital expenditure relative to our current plans while maintaining our growth trajectory.”
"Our focus in Iron Ore and Coal is to safely stretch the potential of our existing infrastructure and equipment. In Copper, BHP Billiton holds many of the industry’s best brownfield development options with projects under evaluation at Escondida, Spence and Olympic Dam.
"In Petroleum, the Group continues to prioritise value over volume which dictates a focus on Onshore US liquids development and investment in high-return brownfield projects across the Conventional business.
“In the Eagle Ford and Permian (shale formations in the US) we are forecasting liquids production of approximately 200 thousand barrels per day by the 2017 financial year. This is expected to generate significant value as investments in our liquids-rich Onshore US wells typically generate returns of over 50 per cent.
“In time, we expect to fully develop our Haynesville gas field given the quality of our acreage. As we look to improve the balance of liquids and gas across our Petroleum portfolio we have initiated the marketing our Fayetteville acreage. However, we will only divest the field if it maximises value for shareholders.”
“Our strategy, including our commitment to a strong balance sheet, has worked well for our owners. We have delivered a total shareholder return of 394 per cent over the last decade including US$64 billion in dividends and buy-backs.
"By safely improving operating and capital efficiency we will maximise value and increase cash returns to our shareholders. Improving our competitiveness will benefit shareholders and the local communities and economies in which we operate,” Mr McKenzie said.
BHP shares edged up 0.3% to $33.81 before the release of Mr McKenzie’s presentation which came well after trading had ended for the day.
