BHP CEO Marries Oil With Chemistry to Get Value From Mining

When BHP Billiton Ltd. (BHP)’s new chief executive officer Andrew Mackenzie got his doctorate in chemistry in 1980, the ground-breaking research attracted the attention of oil producers including Chevron Corp. (CVX)

It wasn’t until three years later that Mackenzie, 56, joined BP Plc (BP/) and stayed for 22 years, while the findings of his research are still in routine use by academics and oil explorers. He will take the lead at Melbourne-based BHP, the biggest mining company, on May 10, succeeding Marius Kloppers.

Mackenzie, who had about 12 months enforced gardening leave after Kloppers, 50, poached him from Rio Tinto Group (RIO) in 2007 to head BHP’s copper division, used the time to master Spanish -- his fifth language -- to help him conduct contract talks in South America as soon as he started, a person familiar with his appointment said yesterday. Mackenzie said he’s uniquely placed to wring more efficiencies out of BHP’s mining and oil operations, which include shale assets in the U.S.

Mackenzie “brings a level of knowledge within both management and within industry, which is clearly new if you look at the past people in that job,” said Tim Barker, who helps manage investments, including BHP, at BT Financial Group Pty in Sydney. “The market has still got a bit of a question mark over the acquisition of the shale oil division. It’ll probably be two or three years before we know if it was a good one or not.”

‘Very Aggressive’

BHP is spending $4 billion this fiscal year on shale, and spent $20 billion on acquiring the assets in 2011. Kloppers cleared the decks for his successor by booking a $2.84 billion charge in August on the value of the assets after prices fell to a 10-year low in April. He defended the purchases as a long-term investment in a shale liquids boom that’s now poised to make the U.S. the world’s largest crude producer by 2020.

Mackenzie’s appointment “is very aggressive from a timing point-of-view,” Evan Lucas, market strategist at IG Markets Ltd., said in an e-mail. “We knew it was coming, but this shows BHP is looking to get onto the front foot with a division it has been keen to invest in over the last few years -- petroleum.”

BHP, whose oil and gas operations span more than a dozen countries, fell 3.8 percent to A$37.17 at the close of trading in Sydney. The key S&P/ASX 200 Index declined 2.3 percent. As of yesterday, the company’s London-traded stock gained 23 percent during Kloppers’ tenure from Oct. 1 2007, while Rio gained 3.8 percent, Xstrata Plc (XTA) declined about 38 percent and Anglo American Plc (AAL) fell about 42 percent.

There are some “quite powerful synergies” that you can unlock in mining and petroleum, Mackenzie told reporters yesterday. “We’re one of the few, possibly the only company, that can create value through unlocking those synergies.”

BHP Jewel

The company’s oil projects include Shenzi in the Gulf of Mexico and Pyrenees off the coast of Western Australia. BHP plans to spend about $775 million this financial year on oil and gas exploration, with most of the drilling scheduled for the Gulf of Mexico, BHP said in a Jan. 23 statement.

BHP’s oil and gas business is “one of the jewels,” for the company, Andrew Williams, a Melbourne-based analyst at RBC Capital Markets, said by phone. “U.S. gas prices at some point are going to rally, so they will get a bit more value out of that, particularly if they can leverage that into perhaps some of the liquefied natural gas opportunities.”

Mackenzie got his doctorate from the University of Bristol, and has published more than 50 research papers and pioneered extraction techniques in the North Sea for BP, BHP said yesterday in a statement. He founded the BP Institute at the University of Cambridge as well as institutes at Princeton and Berkeley universities and the California Institute of Technology. He joined Rio in 2004 and as chief executive of industrial minerals he built a $5 billion titanium mine in Madagascar.

Brilliant Scientist

“Andrew was a brilliant academic research scientist who chose to leave the world of academe for the wider world, becoming not only a captain, but dare I say admiral, of industry,” Professor James Maxwell, emeritus professor of chemistry at the University of Bristol, said when Mackenzie was awarded an honorary degree of Doctor of Science in February 2011 at the university.

While both Kloppers and Mackenzie have high IQs, the new CEO has a higher EQ, or emotional quotient, according to the person familiar. Kloppers isn’t a money-focused person and felt the loss of privacy that came with the role, the person said.

Third Strike

Kloppers, who yesterday reported a 58 percent decline in first-half profit, is the third head of a global mining company to step down since October as mining companies struggle with project writedowns, escalating costs and the aftermath of failed deals. He sold $4.3 billion of assets in the half and put about $68 billion of projects on hold last year.

Some mining company executives and shareholders are paying the price for a $1.1 trillion mergers and acquisitions binge over a decade. Failed deals in aluminum and coal caused $14 billion in writedowns at Rio and cost CEO Tom Albanese his job. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which slashed $4 billion off the value of an iron ore project in Brazil. She leaves in April.

“Sometimes it becomes easier culturally to effect a cultural change with a new person,” Paul Phillips, a fund manager in Melbourne with Perennial Growth Management Pty who holds BHP shares, said by phone. “Now it’s about preserving cash. It’s around making sure you do the right projects.”

No Pushing

Under Kloppers, deals totaling about $200 billion were aborted or rejected, including hostile bids for Rio Tinto and Potash Corp. of Saskatchewan Inc. Kloppers could have remained as CEO if he wanted and nothing pushed him out, according to the person familiar.

BHP’s decision to abandon the bid for Rio Tinto during the depths of the global financial crisis laid the foundations for the company’s growth since then, Kloppers told reporters yesterday, adding that BHP’s returns to shareholders had “dwarfed” its peer group of global mining companies.

The company returned $36 billion to shareholders in the past five years - more than any of its peers, Chairman Jac Nasser told the reporters.

“I’d say out of all the large diversified mining companies he’s the one who’s, how do I put it nicely, he destroyed the least amount of value,” said John Goldsmith, deputy head of equities at Montrusco Bolton Investments, who helps manage C$5.2 billion ($5.1 billion).

There will be no major shift in strategy expected, the person familiar said. It was good that Mackenzie can sit down with iron ore, copper or oil and gas people and understand all of them, the person said. BHP, as well as other major mining companies, is going back to basics, with no more large acquisitions, or mega projects, the person added.

“It’s a leadership change that needs to occur,” said Paul Xiradis, chief executive officer at fund manager Ausbil Dexia Ltd., which holds BHP stock. “Their focus now will be just on driving the costs down and improving the operation within the group.”

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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