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BHP gets with the climate change agenda

18 Aug 2021 9 month(s) ago

There may be scientific debate about climate change, but the big companies are falling over themselves to look as green as they can because that is what the institutional investors require.

The impact of climate change on investment can now be seen in the world’s biggest mining company, BHP. For Australian investors, the Big Australian must always be looked at closely in any diversified portfolio and they have just shifted away from hydrocarbons.

The ABC is reporting that BHP and oil and gas producer Woodside Petroleum have announced a $20 billion merger of their oil and gas businesses to form one of the world's biggest energy companies. “The merger will create the largest oil company on the ASX. It will see Woodside issue new shares to BHP shareholders and Woodside investors will hold a majority stake in the expanded company. The deal needs to be approved by investors and regulators. The expanded Woodside would be 52 per cent owned by its shareholders and 48 per cent by BHP investors.”

It is a big strategic shift for BHP. According to Macquarie, BHP’s petroleum business is valued at US$15.0b and has contributed 13% of Group Ebitda (earnings before interest, depreciation and amortisation) on average over the last 5 years. But the broker says “iron ore remains the key driver” for the company.

“BHP’s Petroleum business is dominated by its Australian and Gulf of Mexico asset portfolios. The division has been a positive contributor to group margins, delivering an average Ebitda margin of +60% over the past ten years, compared to ~50% at the group level.” BHP's petroleum production has been slowing, however:

Macquarie had an outperform rating on BHP just before the merger was announced. The broker notes the importance of ESG (Environmental, Social and Corporate Governance) pressures on bug corporations. Translation: if you want to have a strong share price, then look good on the climate change front otherwise the big institutional investors will mark you down. So even when your ‘dirty’ business is a good earner, it may be a good idea to offload it to avoid the probem:

“BHP’s Petroleum assets have been a strong source of earnings and cash flow for the company over a long period of time (excluding US Onshore shale). The Gulf of Mexico assets have delivered EBITDA margins well above the group average. However, given rising ESG pressures, we are not surprised that BHP is now pursuing a potential exit of the Petroleum business.

“An outright sale to WPL which would see BHP shareholders receive WPL shares via an in-specie distribution appears the cleanest exit path for the company.”

The push is happening across the market. For example, urban services company Downer EDI has it front and centre. Credit Suisse reports:

“Sustainability is now “front and centre” of business, Downer EDI chief executive Grant Fenn said, as healthy profits from transport projects swung the services group back into the black with an annual net profit of $182 million. Downer already produces recycled materials to build and maintain roads, but sees other sustainable business opportunities, including building and maintaining charging stations for electric vehicles, as well as making low-emissions trains and zero- emissions buses.”

Yep, everyone is into it.


Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.



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