Next year's outlook for BHP Billiton Limited (ASX: BHP) is looking pretty robust with the stock looking like it will deliver a capital gain of around 10% this calendar year as few will dispute the mining giant's pole position when it comes to generating cash.
But there is another reason why BHP could be well supported in 2018 as the company took a step closer in divesting its unconventional oil assets following a news report in Fairfax that it had appointed Barclays and Bank of America-Merrill Lynch to explore options for these assets.
One possible option is to spin off its shale oil assets into another listed entity. If it follows this path, it will be the second time BHP has cut the apron strings in the last three years following the listing of South32 Ltd (ASX: S32) in May 2015.
A spin-off is seen as a more tax effective way of disposing of these assets, which were bought by BHP at the height of the shale oil mania. The miner was forced to write down the value of some of these assets since.
Investors should be excited by the prospect of a shale spin-off even though I am not predicting a share price jump for BHP on such a transaction. The fact is, the parent stock doesn't seem to perform particularly well following such divestments.
It is the child stock that has historically outperformed instead, and you can see evidence of that by comparing the share price performance of South32 and BHP. Interestingly, South32 used to be called "CrapCo" by the media before the divestment!
But since that time, South32's share price has rocketed around 44% while BHP is down by nearly 7%. This is why you shouldn't be too quick to sell your entitlement to the child.
There are some reasons to think BHP's unwanted shale baby will also follow the same trajectory as South32 despite ongoing worries about falling oil prices from oversupply of the commodity and waning demand due to the growing popularity of electric vehicles.
For one, oil exports from the US is at a record high and a big chunk of that relates to shale oil. It seems oil companies can't pump the black gold out of the ground fast enough and BHP's unconventional projects are located in that country.
Against this backdrop, investors will likely be happy to adopt the BHP spin-off, although this isn't the only option that BHP and its advisors will be looking at.
Another option is for the miner to sell the assets. Some of the cash from such a sale is more than likely to flow back to shareholders in the form of a capital return – which could include an off-market share buyback that will utilise BHP's large pool of franking credits.
Both options look fairly compelling on face value and may help BHP close the performance gap that has opened up between itself and Rio Tinto Limited (ASX: RIO), with the latter delivering a capital gain of around 15% since January.
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