David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Way back in the 1880s, no one put much value on the long-term health of Broken Hill Pty.

According to a story that's been told for more than a century, the stock price of the Australian miner now known as BHP Billiton Ltd. was once decided by two early shareholders over a game of cards.

Things have changed a lot since then, of course -- and differences over how to protect a legacy once gambled on a hand of euchre form the heart of the dispute between BHP and Elliott Management Corp.

When in a Hole, Keep Digging
BHP's 2011 foray into the U.S. shale sector has seen its petroleum division eat up $20B
Source: Company reports, Gadfly calculations
Note: Aggregated figures, starting base December 2010. Shows a mix of balance sheet and income statement items.

By any reasonable assessment, the company's foray into onshore U.S. petroleum has been a disaster. The 2011 acquisitions of Petrohawk Energy Corp. and Chesapeake Energy Corp. cost $19.6 billion for starters, and since then the businesses have succeeded only in eating up capital. Thanks to the onshore U.S., BHP's petroleum segment -- which also includes some rather good assets off the shores of Australia and in the Gulf of Mexico -- hasn't posted Ebit exceeding its capital spending since the December half of 2011. Subtract all the unit's capex and impairments from aggregate Ebit over the six-year period and a $20 billion hole opens up.

BHP doesn't really contest that assessment. But the harder question is what to do about it. 

One option, favored by Gadfly, Elliott, and -- according to Elliott -- a significant slice of BHP's own shareholders, would be a wholesale review of BHP's petroleum business with an eye to a partial or complete spinoff. "Petroleum does not belong in BHP's (or any mining company's) portfolio," Sanford C. Bernstein Ltd. analyst Paul Gait wrote in a note to clients after Elliott's initial approach.

Mining investors aren't always experts on petroleum and vice versa, and sum-of-the-parts comparisons with Rio Tinto Group's similar portfolio of assets suggest that BHP's shareholders don't attribute anything like the value to its oil and gas assets that the unit might be worth on its own.

Pillars Fall
BHP is a much more focused business than it was in 2011, but as a result it has less diversity
Source: Company reports, Gadfly calculations
Note: "Steel alloys" is nickel and manganese. Nickel is no longer a core business. "Copper" in 2011 included other base metals including zinc and lead. Some divisions have been run together for clarity.

The problem for BHP management is that their offshore oil and gas units continue to generate impressive cash flow. Credit rating companies argue the exposure makes the company a more attractive borrower than it would be otherwise.

On a more profound level, without oil and gas, BHP's cupboard of resources assets could get worryingly bare. The company is still the world's biggest miner, but since the demerger of the underperforming assets that made up South32 Ltd. it's lost its octopus-like hold on most raw materials and become a more focused play on steel, petroleum and copper.

A decade hence, if a glut of steel scrap starts undermining blast furnaces' demand for iron ore and coking coal, a BHP without petroleum might look like little more than a very expensive copper miner.

Thicker Than Water
On a rough approximation of free cash flow, BHP's offshore petroleum assets are a bigger contributor than copper
Source: Company reports, Gadfly calculations
Note: Approximate free cash flow calculated as underlying Ebitda minus capital expenditure. For pre-2013 figures, only assets that have remained with BHP Billiton since the South32 split have been included.

Such a long-range perspective makes sense for BHP's managers, who are trained to think in decades at the minimum. The mantra among mining companies of seeking low-cost, tier-one mineral deposits is another way of saying they want assets they can still be digging up in 2050, or later. BHP has boasted of how its Escondida copper pit could still be in operation well into the 22nd century.

Shareholders' time horizons are significantly less expansive, though. They'll buy BHP when it looks cheap, and sell when it looks expensive. Even Blackrock Inc. and Aberdeen Asset Management Plc, the current largest shareholders, weren't important enough to merit mention in the company's listings of major investors until its 2010 and 2014 annual reports, respectively.

Institutional investors care deeply about a company's performance this fiscal year, and probably want to see it hold up well over the next five, too. Most, however, couldn't care less whether BHP is still the world's biggest miner -- or even a functioning company -- come 2050.

That's the crux of the debate over BHP's oil and gas portfolio, and Elliott's best hope of peeling away enough major shareholders to get management to change course.

For many years, BHP's pitch to investors has been that the company has the best expertise to select a commodity portfolio to generate long-term growth. The catastrophic stumble in onshore U.S. petroleum has damaged investors' faith in that proposition, and made shareholders question whether they might not be able to do better themselves.

If institutional investors think their resources portfolios could be better managed by having positions in separate mining and petroleum BHPs that they can add to or reduce when they want, that's what they'll ask for.

Vast, storied businesses like to boast of their long-term focus -- but companies, like the mined-out Broken Hill lode on which BHP's fortunes were built, aren't immortal. If we're all going to be dead in the long run, shareholders are entitled to ask for a better return while they still draw breath.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Then again, as Gadfly Liam Denning has written, the world's biggest oil company seems sceptical about the future of petroleum, too. The rise of electric cars could do the same sort of damage to the oil market as the rise of electric arc steel furnaces could do to iron ore and coking coal.

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David Fickling in Sydney at

To contact the editor responsible for this story:
Matthew Brooker at