Leading shareholders in BHP Billiton, which is coming under pressure from activist hedge fund Elliott Advisors to spin off its US oil business, want the mining company to go further and look at demerging its entire unit involved in crude and gas production.

Investors are also calling on the Anglo Australian mining group to release details of two reviews it commissioned from investment banks that concluded its US oil business was worth more inside BHP than out.

Four top 20 shareholders in BHP’s UK-listed arm said they wanted the group to evaluate the case for spinning off its petroleum business, which has operations in Australia as well as the US, and is valued by analysts at between $26bn and $32bn.

The shareholders’ stance — coming after Elliott last week demanded a demerger of BHP’s US oil business — is expected to increase the pressure on chief executive Andrew Mackenzie to explain why the world’s largest mining company by market capitalisation should retain the unit. Most mining groups do not also produce oil and gas.

“I would be hoping to see some kind of demerger,” said one leading BHP shareholder, referring to the case for spinning off the entirety of the company’s oil business.

The shareholder, who declined to be identified, added that BHP’s assertion of benefits stemming from having diversified earnings “doesn’t stack up”.

Aberdeen Asset Management, the third-biggest shareholder in BHP’s London-listed arm, said it was sympathetic to demerging the company’s oil and gas business.

“We’re not against the idea of spinning it off, it’s more a matter of working out the economics,” added Hugh Young, a Singapore-based managing director at Aberdeen. “If you’re getting out of the business you might as well get out of the entire business.”

Another top 20 shareholder in BHP’s London-listed arm said: “The future of the oil business is the biggest question raised by Elliott and it’s the biggest change that could happen with the company.”

BHP declined to comment on the shareholders’ views.

Last week, Elliott went public with a three-part plan it said would improve returns for BHP shareholders. 

As well as spinning off its US oil business, Elliott said BHP should scrap the group’s complex corporate structure involving companies that are listed in the UK and Australia, and adopt a new capital returns policy.

While shareholders said BHP’s rejection of Elliott’s proposals on structure and returns was sound, the company was much less convincing on the reasons for retaining the oil business.

Several investors expressed scepticism at BHP’s claims that there are significant benefits from having mining and oil businesses under one roof.

BHP said last week it had hired two investment banks at the end of last year to look at its entire oil and gas portfolio, and they had concluded a separation of the business would not create any value. The reviews were also discussed by BHP’s board, added the company. 

“They owe shareholders a deeper explanation of the reviews,” said the leading BHP shareholder. “Mixing BHP’s world-class mining assets with its petroleum business means the combined company trades at a lower multiple.”

One smaller shareholder in BHP’s Sydney-listed arm said the group should consider selling some of its US shale assets.

BHP expects its petroleum business to produce up to 575,000 barrels of oil equivalent per day in the year to June 30.

Although the unit has deepwater oil and gasfields off Australia, the bulk of the business is focused on the US, including offshore operations in the Gulf of Mexico.

BHP ranks as a top 10 producer of US shale oil and gas, but its $20bn bet on unconventional energy in America in 2011 proved ill-timed.

BHP’s acquisition of two US shale producers was followed by a savage oil market downturn in which crude prices slumped, and the company has racked up $12bn of asset impairments. 

Last October, BHP briefed investors on its US shale business, saying even if oil prices rally by one-third the fields would not generate significant free cash flow until the turn of the decade.

Elliott is digging in for a protracted battle with BHP and is preparing to issue a rebuttal to the company’s detailed response to its proposals.

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