Tuesday, October 28, 2014

BHP Looking to Sell Fayetteville Shale Assets (and a Dose of Cynicism)

Well, when I first read the headline in the Financial Times, it said "BHP puts gas asset up for sale as it finetunes US shale business" (good article but may require registration; here's another).  My first thought was that BHP was going to unload its Petrohawk assets, including the Haynesville.  Instead, BHP is looking to dump the Fayetteville Shale assets it bought from Chesapeake Energy in 2011 for $4.75 billion.  Seemed like a good idea at the time, at least for Chesapeake, but it hasn't worked out for BHP because natural gas prices have remained in the toilet since then.

The sale is part of a larger corporate strategy by BHP to focus on its Big Four commodities:  iron ore, petroleum, copper and coal.  It also wants to shift its oil and gas focus more towards liquids than gas (sound familiar?), which is pretty much all you would get from the Fayetteville.  Over the past decade, it became fashionable for the big mining conglomerates to cobble together as many different assets as possible to (unintentionally) become unmanageable behemoths.  Fashionable, meaning the companies' stock prices increased as Wall Street analysts fawned over them.

Now the trend has shifted back to being a leaner, more manageable company focused on core assets.  As a result of this cyclical fashion shift, BHP is also shedding its aluminum, manganese and nickel businesses into a spinoff company (nobody wanted to buy them since all the other miners are following the slim-down fad), and the company is looking to raise money to pay down debt and make more "core" acquisitions by selling "non-core" assets, like the Fayetteville.

I might sound cynical, but what we are seeing is yet another case of the tail wagging the dog.   Stock analysts and investment bankers clamor for companies to go a certain strategic direction - in this case, bulking up through consolidation - that often involves lots of acquisitions and fundraising, which enriches the bankers.  All of the other companies in a sector dutifully follow the leaders like lemmings until something in the market changes - in this case, a macroeconomic shift led by China's slowing growth and diminished appetite for commodities - and the cycle reverses.  Analysts scream that the miners are bloated and inefficient and must focus on their core commodities.  Panic ensues, investors run in circles, bankers lick their chops.  Now the miners are selling assets and restructuring, and the bankers are getting paid...again.

It's a predictable deadly cycle that is repeated in every sector.

1 comment:

Brian said...

Same thing is going on in coal. Most of the big coal players all did acquisitions in 2011 when coal prices were much higher. Now a combination of slower Chinese growth and a massive increase in capex in the sector has brought prices way down. Of course, all these deals were done with debt, and now most of the buyers from 2011 will go toes up.