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Why BHP Group Stock Fell 15% in August

By Reuben Gregg Brewer – Sep 3, 2021 at 12:03PM

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The giant mining company is making changes to its business, and it seems investors are unenthusiastic about its plans.

What happened

Shares of giant international miner BHP Group (BHP 0.65%) fell by 15% in August, according to data from S&P Global Market Intelligence. The bulk of that drop came largely around the time that it delivered its fiscal 2021 earnings update. The rumor mill actually started heating up a few days before the release, leading BHP to make a public comment, with more details provided when it announced its financial results. All the hoopla appears to be about the company's energy business.

So what

Although BHP's biggest businesses involve mining for commodities like iron ore, coal, and copper, it also has a division dedicated to extracting crude oil and natural gas. With nations around the world pushing to reduce carbon emissions, drilling for these still-vital fuels has come under more intense regulatory scrutiny. The pandemic shutdowns in 2020, meanwhile, led to steep price declines in the energy space, highlighting the volatility of the sector and the long-term risks if these fuels should fall out of favor.

A group of people in protective gear in a mine.

Image source: Getty Images.

In fact, investors have been wondering what BHP would do with its energy business for some time. Just prior to the company's earnings release, whispers started swirling that the company was looking to make a move. On Aug. 16, it responded to the rumors by confirming that it was looking at strategic alternatives, and revealing that one option under consideration involved a potential deal with Woodside, an Aussie energy company. The next day, along with releasing its earnings report, BHP announced that it had, in fact, reached an agreement with Woodside.

The deal still needs to receive final approvals, but the basic plan is for Woodside and BHP to merge their energy operations, at which time BHP shareholders will receive shares of Woodside. Thanks to the headwinds in the energy sector, it looks like BHP is dumping its energy business at a time of weakness.

Meanwhile, BHP also announced that it was moving forward with a big investment in potash. So, the narrative on Wall Street was that BHP is taking on more spending, and seems to have little to show for the divestiture of its energy business.

Now what

In the long run, the move away from the oil and natural gas space is probably a good call for BHP -- it didn't really fit well with its other operations. Mining for potash, by contrast, is much more similar to the rest of its business. Meanwhile, the company reported materially improved year-over-year results, so if it's going to shake things up, now is probably a good time to do it. All in all, long-term investors should probably focus on what BHP is going to look like a decade from now, rather than on what it will be doing over the next year or so.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

BHP Group Ltd. Stock Quote
BHP Group Ltd.
$63.43 (0.65%) $0.41

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