Tuesday, July 23

BHP Bets on Lower-Carbon World With Petroleum Exit, $5.7 Billion Potash Project

SYDNEY— BHP Group Ltd. BHP -8.82% , the world’s largest mining company, bet on a lower-carbon world by agreeing to sell its oil-and-gas unit and separately approving a $5.7 billion project to mine potash in Canada.

BHP’s all-stock deal to sell its oil-and-gas business to Australia’s Woodside Petroleum Ltd. WOPEY -2.84%, which will lead to its shareholders owning about 48% of the expanded company, was accompanied by a decision to end the dual listing of its shares in London. Some BHP investors previously lobbied for both of those changes, but they had been rebuffed until now.

Still, BHP’s decision is a blow to the London Stock Exchange, which has prided itself as the go-to place for mining companies to raise capital, attracting metal producers from Chile, Mexico, and Russia in recent years. The company’s primary listing will now be in Sydney.

BHP signaled a potential strategic shift on Monday when it said a review of its petroleum division was underway. It said talks to combine it with Woodside were being considered, among other options. Analysts valued the unit at $15 billion, just smaller than Woodside’s $15.5 billion market value at the time the discussions were made public

Resource companies are fighting to change investor perceptions that mining is problematic, including the role that their commodities play in producing emissions that contribute to global warming. Many are accelerating investments in mined commodities, such as copper and nickel, which are used in products like batteries that are critical to a transition away from fossil fuels.

Beginning last year, several large European oil companies including BP PLC and Royal Dutch Shell PLC made public commitments to eliminate emissions and have begun selling fossil fuel assets that emit more carbon as well as investing more in renewable energy. Following one of the most expensive proxy fights ever, an activist hedge fund elected three new members to Exxon Mobil Corp.’s board and has pressed it for a bolder path to reducing emissions.

However, it is a difficult pivot for companies to make as the production of fossil fuels can be highly profitable. It will also take years before vehicles and other infrastructure that require fossil fuels are replaced, which BHP acknowledged when announcing the deal with Woodside.

“The merger of our petroleum assets with Woodside will create an organization with the scale, capability and expertise to meet global demand for key oil and gas resources the world will need over the energy transition,” BHP Chief Executive Mike Henry said.

Shareholders would benefit from being able to choose whether they want to keep investing in the energy sector, he said, while denying the sale was a statement on the future of oil and gas.

BHP and Woodside said the business would be one of the world’s 10 largest producers of liquefied natural gas. Combining the businesses is expected to generate more than $400 million in annual savings, the companies said in a joint statement. They expect the deal to be completed by July next year.

Selling the petroleum business will lead to BHP focusing on mined commodities: iron ore, metallurgical coal, copper, and nickel. On Tuesday, BHP confirmed that potash is on that list by approving the first stage of its Jansen project in Canada’s Saskatchewan province. The operation is expected to start production in 2027, with an annual capacity of 4.35 million metric tons of potash.

Potash is one of three major fertilizer ingredients, alongside nitrogen and phosphate. BHP believes demand for potash could as much as double by the late 2040s to become a $50 billion market. Mr. Henry said mining at Jansen could last about 100 years.

“Under our 1.5-degree scenario, potash stands to be a winner, with increased biofuel production and intensified competition for land due to afforestation,” Huw McKay, BHP’s chief economist, said in June. Potash also doesn’t generate some of the negative environmental impacts that other fertilizer nutrients do, especially the release of greenhouse gases during the application, he said.

Potash is seen by farmers as an attractive resource because it tends to boost yields, aid in drought tolerance, and improve crop quality.

BHP has wanted to be in the potash trade for some time. A decade ago, it unsuccessfully bid $38.6 billion for Potash Corp. of Saskatchewan, which is 2018 merged with Agrium Inc. to form Nutrien Ltd.

The announcements were made alongside BHP’s annual earnings. BHP said for the year through June, it posted a net profit of $11.3 billion, up from year-earlier earnings of $7.96 billion, driven by high prices of iron ore. The company declared a record final dividend of $2.00 a share.

BHP said its plan to end its dual-listing structure will likely lead to its expulsion from the FTSE 100, one of the world’s most prestigious stock-market indexes. While BHP would still have a standard listing in London, funds that track movements in the FTSE 100 will be forced to sell their shares.

BHP’s shares currently trade as two companies: BHP Group Ltd. in Australia and BHP Group PLC in London.

A 2018 report commissioned by activist investor Elliott Management Corp. claimed shareholders could gain more than $22 billion if BHP gave up what the New York hedge fund called an “obsolete and value-destroying” structure to become a single Australia-incorporated company. BHP at that time said the costs and risks outweighed the potential benefits.

Now, “we think that the case for BHP’s unification is quite compelling with cost having come down, [and] with less than 5% of BHP’s profit now being generated on the PLC side of the business,” said Mr. Henry.

A single structure “will make mergers, demergers, acquisitions all easier to do,” Mr. Henry said.

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