Are shareholders in BHP Billiton Limited set for an $18bn windfall?

Shareholders in BHP Billiton Limited (ASX:BHP) might get a bigger-than-expected cash return from the world’s largest miner this year. Here’s why…

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Mining giant BHP Billiton Limited (ASX: BHP) may be able to deliver a bigger-than-expected capital return later this year on news that it could get as many as 50 qualified and interested parties to look at its shale assets.

There’s nothing like a bit of competition to drive up asset prices and BHP has already gotten 24 parties to sign confidentiality agreements to enter its data rooms for the sales, according to the Australian Financial Review.

The market is already expecting the sale of its unconventional oil & gas assets and for BHP to hand most of the proceeds back to shareholders in some form of capital return.

However, investors are pricing in the sale at a big discount to book value as BHP had overpaid for these assets during the “boom” times and had to write down their value.

Even then, these assets (namely Eagle Ford, Haynesville, Permian and Fayetteville) are sitting on BHP’s balance sheet with a US$14 billion ($17.88 billion) valuation – or 42% lower than what the miner thought it was worth in 2015.

I don’t think the market believes BHP can get that much for the assets but the discount to book value may be skinnier than what many are thinking given the intense interest BHP seems to be receiving.

What’s more, the oil price is holding up better than what experts were forecasting last year and that has no doubt contributed to the interest in these assets.

Some keen buyers are offering an asset swap or a combination of assets and cash to consummate the deal. It’s too early to predict the outcome but BHP’s board knows an all-cash deal would be the favoured outcome for investors as the world’s largest miner has indicated that it will give back as much cash as possible to shareholders from the sale process.

Getting a cash offer that is close to book value will trigger a rally in BHP’s share price. To give you a sense of perspective, the miner paid an interim dividend of $2.28 billion this year. Getting sales proceeds that are anywhere close to $18 billion is game changing!

But it’s unlikely that BHP will use a one-off windfall to increase dividends. Most of the cash is likely to be returned through a share buyback of some sort – similar to how Rio Tinto Limited (ASX: RIO) undertook its latest capital return – although a special dividend cannot be totally ruled out either.

As I wrote, the cash-flushed BHP could unseat Commonwealth Bank of Australia (ASX: CBA) as the most generous dividend payer on our market in the not-too-distant future.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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