S&P warns BHP oil and gas exit threatens its credit rating

BHP Group PLC updates

S&P Global has warned BHP that the miner’s decision to sell its oil and gas business could threaten its credit rating, since it will leave the group even more reliant on iron ore.

The rating agency said it could lower its rating on BHP by up to two notches in the coming months as the loss of the petroleum unit would result in a “less diversified portfolio”.

The warning follows BHP’s announcement last week that it will sell the business to Australia’s Woodside Petroleum in exchange for shares that will be distributed to investors. BHP, which also unveiled plans to shift its primary stock market listing to Australia, said it would put the miner in a better position to focus on commodities that would benefit from a global transition away from fossil fuels towards clean energy.

But S&P said BHP’s expansion into potash, a fertiliser, as well as increased focus on nickel and copper “are likely to have a modest impact in the short to medium term”, adding that the group’s portfolio may become “slightly less diversified” than some of its peers such as Rio Tinto, Glencore and Anglo American.

S&P said it had put BHP’s investment grade A and A-1 short-term rating “on CreditWatch with negative implications”.

S&P’s view contrasts with that of rival Moody’s, which said last week that the sale of the oil and gas assets would be “credit positive” for BHP from an environmental, social and governance (ESG) perspective.

The deal “marks further material progress in BHP’s push to lower carbon emissions and increases the portfolio mix towards commodities that will likely benefit from the global push to decarbonise,” Moody’s said.

BHP has been steadily selling its unwanted assets over the past few years, disposing of its lossmaking US shale oil business in 2018 to BP and demerging its aluminium, manganese and other assets into a new company, called South32, in 2014.

The oil and gas business contributed about 6 per cent to BHP’s earnings before interest, tax, depreciation and amortisation at $2.2bn in the twelve months to June. Iron ore generated $26.3bn of BHP’s earnings, while copper accounted for $8.5bn and nickel $300m, S&P said.

“We previously saw BHP’s diversification into the oil and gas sector as positively differentiating BHP from some of its peers, given our view that the petroleum assets are very competitive,” S&P said.

The merger of BHP’s oil and gas business with Woodside Petroleum is expected to be completed by the second quarter.

Shares in BHP rose by 0.4 per cent on Tuesday to £22.16p in morning trading in London, amid a broad-based rally in the commodities sector.

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