LONDON, July 21 (Reuters Breakingviews) – BHP (BHPB.L), (BHP.AX) and oil may not be bedfellows much longer. The $170 billion global miner is mulling whether to jettison its petroleum arm, Bloomberg reported on Tuesday. Notwithstanding the boom in energy prices right now, boss Mike Henry would be wise to exit the business sooner rather than later.
Not long ago, Henry was still treating oil as a core part of a portfolio that also includes iron ore, copper and potash. No wonder. Even though BHP sold U.S. assets to BP (BP.L) in 2018 and the division’s projected $2.5 billion of EBITDA in 2022 is less than a tenth of the group figure, it represents a growth engine for BHP. The oil arm could increase EBITDA to $5 billion by 2027 even if oil prices fall to $55 a barrel, Citigroup estimates, because production could jump as BHP invests to expand capacity.
On the other hand, it’s a good time to get out. Oil prices are at $70 a barrel, against $44 a year ago. That will encourage buyers to pay more, or enable Henry to spin the division off at a higher valuation. And with investors increasingly focused on environmental, social and governance issues, plenty of oil companies will be looking to divest assets down the road. Henry might get less if he waits.
BHP’s oil assets, based in the Gulf of Mexico, Australia and Trinidad and Tobago, carry an enterprise value of $14.4 billion, Citi reckons. That’s 6 times their expected EBITDA in 2022, appreciably higher than BHP’s own multiple of around 4. It’s also higher than oil majors like BP, which have been trading below 4 times. The risk for Henry is that he exits at a more BP-like price.
Still, local Australian oil rivals like Woodside Petroleum (WPL.AX) also fetch higher valuations. And even if Henry offloaded his oil assets at a 2022 multiple of only 3 times, its rump would only need to lift its own valuation a bit to maintain its current enterprise value. Luring investors who are currently down on BHP for holding fossil fuels would be the quickest, and greenest, way to make that happen.