BHP announced it has sold most of its US onshore oil and gas assets to BP for US$10.5bn and the remainder to MMGJ Houghton for US$300m. The company has committed to returning the proceeds to shareholders, which would be equivalent to around 8.6% of market capitalisation. We have maintained our Accumulate recommendation with a $39.00 target price and the stock remains our preference among the large-cap miners.
The share buyback is likely to be a 60/40 mix of off-market buyback in the Australia-listed shares (Ltd) and an on-market buyback of the UK-listed shares (Plc). We note BHP’s US$11bn franking balance provides significant headroom to undertake the off-market component.
A special dividend is possible, although we believe the company is more likely to undertake a share buyback due to the lasting benefits of less issued capital, such as EPS and net present value (NPV) per share accretion.
Assuming a US$6bn off-market buyback of the Ltd shares and a US$4bn on-market buyback of the Plc shares, the outputs from this scenario highlight about 7% EPS accretion and 2% NPV per share accretion – at current prices, the shares would be purchased 23% below our NPV. Our base-case model currently factors in the cash on balance sheet and zero earnings from FY19 for the US onshore assets. We have not assumed a buyback in our base case as the timing and form of capital management are as yet unclear.
We note the following net impact on our forecasts: 1) an 8% higher FY19E net profit; 2) a 5% reduction in FY19E operating earnings; 3) a 2.0-percentage-point increase in return on capital employed to 16%; and 4) a 2.0-point drop in the forward P/E multiple to about 13.5 times.