![Andrew Mackenzie, chief executive officer of BHP Billiton has delivered a bumper half-year profit.](/content/dam/images/g/q/u/3/9/k/image.related.afrArticleLead.620x350.guhxun.png/1487666130404.jpg)
As any weight watcher will tell you, the challenge of shrinking comes with success.
BHP Billiton's interim numbers stand confirmation that it is reaping very full benefit from its energising exercise in reduction. The billion dollar task now is to ensure that three years of often quite painful heavy lifting is not wasted and that the benefits of price normalisation are most effectively devoted to the highest yielding growth and to short-term shareholder satisfaction.
Andrew Mackenzie has delivered a consensus-smashing interim result that announces an unanticipated recovery of the BHP cashflow machine just as certainly as it confirms management's intent to reward shareholders and a firm bias to continued balance sheet recovery through debt reduction.
But, given that the full bounty of spiking iron ore and coking coal prices will flow through in BHP's numbers for the March quarter, there is emerging potential that BHP's defensive bias will shift by the end of this financial year. Net debt hit $US20 billion by the end of December and BHP looks almost certain to comfortably outstrip expectations that gearing would be orbiting 20 per cent by year's end.
Since Andrew Mackenzie took the BHP helm in 2013, the Global Australian has structurally lowered it costs, transparently improved productivity, contained capital investment, pruned debt and exited from commodities it didn't like and from businesses that did not justify the time and capital needed to run them from business.
This has proved, at times, controversial. Some maintain that the whole resources sector has got it wrong by racing each other down the cost curve rather than closing the apertures of supply to recover price supporting balance in the market.
But the new orthodoxy of cost, productivity and capital spending containment has held true and the unexpected but welcome recovery of bulk minerals and metals prices has proved enriching encouragement.
Mackenzie's ambition has been to create a business that was better designed to meet the immediate difficulties that introduced him to authority while creating the potential that the down-sized giant would be capable of flying faster than any future market tailwinds.
In an amplified echo of the numbers presented last week by love child South32, BHP's December half financials offer evidence enough of the mothership's capacity to translate price improvements into free cash flow.
The cash conversion of the best of the miners has been a theme consistent throughout this reporting season and is one that will be repeated when iron ore's Third Force, Fortescue, reports on Wednesday.
The power of the BHP cash machine has been restored in a result that outstripped expectations by an impressive margin. Free cash flow had been expected to range around the $US3 billion. Instead the business threw in $US5.8 billion of free cash.
As a result the interim dividend was set at minimum of the new payout range (50 per cent) and the board took the opportunity to announce a confidence renewed by throwing an extra 10 cents a share ($US500 million) into the pot in what is effectively an expression of capital management.
The shifting sands of cash accumulation and balance sheet recovery leave chief financial officer and strategy boss Peter Beaven the gatekeeper of renewed growth aspirations. Beaven was last year given the strategy portfolio after spending the past three years buttressing the balance sheet, as Mackenzie went about redesigning and repopulating BHP and chairman Jac Nasser set about resetting his shareholders' expectations.
Over the past 18 months or so, Beaven and his finance team have assembled an intricate and robust capital allocation framework that serves to assess the most profitable growth opportunities and to test them against the value that would accrue from other uses of free cash, like capital management. And given the speed and quantum of the cash flow accumulation under way, it looks like Beaven's model will get an earlier test run than many could have imagined.
Succession breeds succession
The elephant in the boardroom for any new company chairman is the chief executive that is inherited with boardroom primacy. That rule sits firmer for Richard Goyder than most.
Goyder's pathway from executive to boardroom life has proved as smooth as in-house silk with the coincidence of his retirement as managing director of Wesfarmers later this year and the inheritance of the Woodside Petroleum chair from April 2018.
I say in-house only because Goyder will join his new board in August this year (which is surely indicative of the timing of his currently unconfirmed final departure from Wesfarmers) at the invitation of incumbent Michael Chaney. And fellow Western Australian business champion Chaney is also chairman of Wesfarmers.
Goyder succeeded Chaney as MD at Wesfarmers. Next year he will repeat that trick but with a pike. Self-evidently, then, present and future Woodside chairmen are exceeding familiar with each other.
Chairman Chaney advises that Woodside's boardroom succession processes are long-baked and discussions about his replacement started 18 months ago. There were many priorities. Logistics was one of them. And that is why former Shell Australia chair Ann Pickard could not be considered despite her eminence. As matched to the task as she obviously is, her Californian residency makes the step from Woodside director to chairperson impractical.
Instead Woodside has turned to "one of the most outstanding businessmen in Australia," Chaney told me on Tuesday. Goyder arrives with long experience in "chairing companies, from coal miners to retailers", Chaney assessed. That experience was gathered while running Wesfarmers. Chaney assesses that task as being an "executive chairman" style role rather than a traditional CEO job. And, doubtless, he should know.
Anyway, by the time Goyder assumes the Woodside mantle, the executive of Australia's biggest gas company will have been led by current managing director Peter Coleman for one month shy of seven years.
So, by the prevailing norms of management succession, the timing of boardroom succession would appear to be just about right. Anything beyond eight years of executive pre-eminence is pretty exceptional in these complicated and testing times.
The thing is, though, Peter Coleman doesn't quite see it that way. There is a view extremely well-informed that says the publicly modest but deeply assertive Exxon trained MD who has done much to make a thoroughly modern business of Woodside is very keen to make extend his tenure for at least another five years.
Looked at from Coleman's point of view, it is easy to see why he might want to hang on in there. And, no, that is not because he has excessive attachment to the trappings of an executive life.
The Coleman view is that Woodside remains very much a transformation in progress and that continuity of direction and strategy will be increasing critical for a business that has shorter term growth and capital deployment challenges but that has accumulated a wealth of medium term options in both gas and oil.
The good news for Coleman is that current chairman Chaney is openly sympathetic to that idea.
"He certainly wants a few more years yet and I would hope he will be here for the next five years," Chaney said. "It is the role of the board as a whole to make sure there is active succession planning. But it is our view that in Peter we have one of Australia's top CEOs and I think Richard recognises that. Peter is an outstanding CEO, an executive right out of the Exxon mode. He has introduced world class discipline and focus to the company," Chaney assessed.
"I think it might be a great relief to Richard knowing that he is coming into the company that has a world class executive who wants to serve for some years yet," Chaney finished.
Again, I am very sure that if anyone knows, it would be Chaney.
Confirmation of Chaney's succession plans arrived on a very busy day for regional gas.
Exxon's $US2.5 billion acquisition of PNG gas aspirant InterOil was finally cleared by courts in Yukon (it is incorporated there). That released Exxon's senior partner in PNG gas, Oil Search, to confirm an end-2018 for a final investment decision on the construction of two new trains at the PNG LNG project that will be fed by the gas from InterOil's Elk-Antelope discoveries (Oil Search is a partner in them too).
And meanwhile, down in historically gas-wealthy Victoria, an unexpected cold snap has triggered spikes in demand that saw prices peak at $13.30 a gigajoule on February 20 and at $13.30 on Tuesday. That meant Victoria has the most expensive gas in the nation. It also means that Victorians were paying three times the highest daily gas price paid through February last year.
The market regulator's explanation is that it was very cold in the wee hours of Tuesday and that spot pricing reflected market shortage. Bans on developing gas in the state mean, for the first time in more than 50 years Victoria will be relying on other states to fix that problem.