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BHP Billiton could demerge oil and gas

BHP Billiton will consider spinning off its oil and gas division if the market continues to undervalue the business, according to Chip Goodyear, chief executive of the Anglo-Australian group.

He said there were no immediate plans to divest the business, which generates about a quarter of the group's operating profit, but said more had to be done to convince investors of its worth. If this failed, we would have to “come up with a different alternative”, he told the Financial Times.

“There is a lot of growth in [the petroleum division] when, as you know, many companies in the business are having a lot of trouble just replacing production,” he said. “I am not sure we have got full value for that.”

BHP's petroleum business, Australia's largest oil and gas producer, is valued at about $14.5bn by Goldman Sachs JB Were. It produced 122m barrels of oil equivalent in the year to June, contributing $1.39bn to the group's $5.49bn of earnings before interest and tax.

After BHP merged with Billiton of the UK in 2001 it was widely assumed in the investment community that the world's biggest diversified mining group would spin off its oil and gas division.

Analysts agree that BHP's share price does not fully reflect the value of its oil and gas assets. “Perhaps some mining analysts do not know how to value them properly,” said Paul McTaggart at Morgan Stanley in London. If the shares do not respond to a planned rise in BHP Billiton's oil production next year, the group could start to look at a demerger, said Mr McTaggart. But he added that Mr Goodyear would prefer to hold on to the oil and gas division, as it is what makes BHP different from other mining companies. “If you take oil and gas away, BHP Billiton looks very similar to Rio Tinto, in both assets and scale,” he said.

Mr Goodyear, who replaced Brian Gilbertson as chief executive last year, said the market was beginning to understand the business better and outlined ambitious growth plans for it.

“We have a good strategic advantage in that business,” the 46-year-old former investment banker said. “We have been a low-cost producer, done a good job in our projects, made some good discoveries and the oil price didn't go down to $10 or $15 a barrel like everyone thought.”

Additional reporting by Rebecca Bream in London

Editorial Notes: I think there is more to it than this article suggests. BHP knows that it is and will be very expensive to find any new oil. They are sitting on mainly depleting oil assets, with some expensive discoveries to exploit (deep-water Gulf of Mexico). It makes good financial sense to sell it and get a premium now, as the future depletion and increased costs may overwhelm oil price increases. That said, it would be a good medium term investment (say up to 5 years), after that the combination of depletion and higher extraction costs will turn this into a risky play. -IG

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