Kloppers Buys Time for BHP Revival as Profit Forecast Drops

BHP Billiton Ltd. (BHP) Chief Executive Officer Marius Kloppers, under investor scrutiny following the failure of three deals, bought himself some time by waiving his bonus after lopping $2.84 billion off the value of BHP’s shale gas assets. The question is, how much?

The world’s biggest mining company is forecast to report a 38 percent drop in earnings to $14.6 billion in the year ended June 30, according to the average of 18 analyst estimates compiled by Bloomberg. That will include writedowns on shale and at the nickel unit, which Kloppers announced earlier this month along with his decision to forgo his bonus.

The charges mark another test for Kloppers after deals totaling about $200 billion were aborted or rejected in the past four years, including hostile bids for Rio Tinto Group and Potash Corp. (POT) of Saskatchewan Inc. BlackRock Inc. (BLK), the world’s biggest asset manager and biggest holder of BHP’s Sydney-traded stock, said in March it had trimmed its holdings, citing the shale deals as a concern.

“Kloppers carries with him the baggage of an M&A junkie,” said Frank Lucas, a director of London-based fund manager and adviser Loeb Aron & Co., which holds BHP shares. “What BHP needs is an absolute top-of-the line general manager who is going to wring out efficiencies from all of its operations.”

Charges Due

BHP, due to report earnings tomorrow, is suffering from a decline in commodity prices as growth slows in China and Europe. This report will include a $450 million charge against BHP’s shale assets, which Kloppers bought for $20 billion last year. Citigroup Inc. (C) valued them at $12.3 billion this month, reflecting a drop in gas prices. Kloppers, 49, took home $11.6 million in salary, benefits and bonuses in the 2011 fiscal year.

Kloppers’ bonus decision follows a similar gesture by Rio CEO Tom Albanese and Chief Financial Officer Guy Elliott after Rio booked an $8.9 billion one-time charge on the value of its aluminum unit. Investor confidence in Kloppers’ leadership has eroded since he became CEO in 2007 and is now below average, according to the Corporate Confidentiality Index, an anonymous survey of analysts and investors, the Australian Financial Review said July 25.

“There is pressure out there, fair or not,” said Michael McCarthy, chief markets strategist at CMC Markets Australia. “If this move, forgoing bonuses, is not enough to placate those investors we are in danger of losing a real talent.”

Industry Writedowns

BHP joined BG Group Plc (BG/) and Encana Corp. (ECA) in writing down the value of shale assets after natural gas prices fell to a 10- year low this year. BHP said Aug. 3 it will cut the value of its Fayetteville assets in Arkansas by a smaller-than-expected $2.84 billion. They were part of the holdings bought for $4.75 billion from Chesapeake Energy Corp. (CHK) It last year also paid $15.1 billion for Petrohawk Energy Corp. BHP’s petroleum CEO Mike Yeager also declined a bonus for 2012.

“The decision by Mike Yeager and Marius to forgo their bonus takes pressure off them,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd., including shares in Melbourne-based BHP. “The question is whether they should have been offered a bonus to begin with.”

Gas prices in the U.S., which dropped to a low of $2.233 per million British thermal unit in April, are set to stay below the $3 mark until at least the end of the year, according to the mean estimate of 11 analyst estimates compiled by Bloomberg. For next year, the average price may rise to $3.48, the data shows.

Gas Slump

“The potential for further writedowns has to exist, it depends on what the gas price looks like,” said Tim Barker, who helps manage investments, including shares in BHP, at BT Financial Group (8306) Pty. The company needs to “maximize the returns from their individual assets” to improve investors’ view of BHP’s track record over the past five years, he said.

U.S. gas prices have declined about 40 percent since Kloppers announced BHP’s entry into shale on Feb. 22 last year because of a supply glut. While the charges were “clearly disappointing” Kloppers said Aug. 3 that the company was still convinced shale would be a significant, low carbon fuel source.

Kloppers, also faced with trimming back capital spending in the light of falling prices and global growth concern, is the best paid CEO of the top-five European mining companies including Rio, Xstrata, and Anglo American (AAL), UBS AG (UBSN) said in a May 16 report. Kloppers got a bonus in cash and shares of $4.7 million, while Yeager was paid $6.6 million last year, including $2.75 million in cash and share bonuses, BHP said.

BHP Outperforms

To be sure, BHP has outperformed its peers, falling 13 percent in Melbourne in the almost five years to Aug. 17 from Oct. 1, 2007, when Kloppers took over. That compares with a 33 percent slide in Rio’s London-traded stock, a 61 percent drop in Xstrata Plc (XTA) and a 55 percent slide in Anglo American Plc.

“You can’t underestimate how hard it is to bring acquisitions to a company of that size,” Tim Riordan, a Sydney- based portfolio manager at Parker Asset Management Ltd. who helps manage A$150 million, said by phone. “Investors are looking at monthly returns and BHP’s management are looking at what’s going to happen in 10 years.”

BHP was “fortunate” to have the benefit of Kloppers leadership in “difficult times,” Chairman Jac Nasser said in the Aug. 3 statement, saying he backed his CEO’s move into shale as a long-term strategy. Kloppers told reporters at the opening of the company’s new office in Perth on Aug. 1 that he was confident he had the support of shareholders, the Australian newspaper reported.

Cash Flow

Lower prices and lower drilling activity “clearly also lowers assessments of the value of future cash flows” from shale, Adrian Wood and Lee Bower, resources analysts at Macquarie Securities (MAQIISF) (Australia) Ltd. said in an Aug. 3 report. “This undermines one of the justifications for the deal, namely the idea that BHP could throw more capital at these assets to accelerate the production ramp up.”

JPMorgan Chase & Co. (JPM), which expects BHP to announce further writedowns this month in other divisions, including the aluminum unit, was “surprised” to see the Petrohawk assets unaffected, the broker said in an Aug. 3 report, adding it was expecting as much as $6 billion in shale writedowns. “Kloppers was given a vote of confidence” by Nasser, it said.

“Marius is under a little bit of pressure with the writedowns,” Grant Craighead, the Sydney-based managing director of Stock Resources, said by phone. If slowing Chinese growth doesn’t change direction soon, he said investors will “be looking for some sort of new direction or plan to be articulated in the next year.”

To contact the reporters on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net; Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editors responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net; John Viljoen at jviljoen@bloomberg.net

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