BHP’s Free Cash Flow Could Fall Short of Covering Its Dividends
Is the Case for a Dividend Cut Crystallizing at BHP Billiton?
Cash flow generation
Generating cash flows is very important in this weak price environment. Cash utilization also indicates a company’s outlook in terms of expansion and growth. In this article, we’ll see how BHP Billiton (BHP) (BBL) is generating and using its cash.
BHP Billiton generated a free cash flow (or FCF) of $6.3 billion in fiscal 2015. Productivity gains of $4.1 billion and a 24% reduction in capital and exploration expenditure to $11 billion were the main drivers behind this FCF generation. BHP is now focusing on productivity-driven growth rather than capital-intensive growth.
BHP has achieved $4.1 billion in productivity gains in the last two years. This was its fiscal 2017 target. It’s targeting an additional $1 billion over the coming year.
Capital expenditure guidance
BHP has a capital expenditure (or capex) guidance of $8.3 billion for fiscal 2016 and $7 billion for fiscal 2017. This is a significant drop compared to its $11 billion capex in fiscal 2015. The breakdown of the company’s capex guidance includes the following:
$1.4 billion for its onshore US business
$1.5 billion for conventional petroleum
$2 billion for sustaining capex
$0.9 billion for exploration
$1.5 billion for remaining expenditure on existing capital projects
In comparison, Vale’s (VALE) growth capex needs are quite high, as it’s still in the process of ramping up its S11D project, a 90-million-ton-per-annum iron ore project. Cliffs Natural Resources (CLF), on the other hand, is focusing on divesting its non-core assets. It doesn’t have any growth capex needs for the time being.
Does FCF cover dividends?
Taking BHP’s consensus EBITDA (earnings before interest, tax, depreciation, and amortization) of $14.4 billion and its EBIT (earnings before interest and tax) of $4.8 billion for fiscal 2016, assuming the adjusted tax rate to be at the fiscal 2015 level of 31.8% and BHP’s capital expenditure guidance for fiscal 2016 to be $8.3 billion, we arrive at a free cash flow of $3.7 billion for BHP in fiscal 2016. This is assuming all other variables remain constant.
This falls short of BHP’s progressive dividend commitments of $6.6 billion and $2.9 billion. Investors, please note that we have not accounted for BHP’s share of Samarco’s liabilities, which could be half of the $5.2 billion lawsuit filed.
Assuming that BHP pays dividends as well as liabilities, it will need to borrow $5.5 billion. This will take its net debt to $30 billion, which will take its leverage to 31.7% from 27.4%. This certainly doesn’t bode well for the company, especially in a falling commodity price environment.
Recently, Freeport-McMoRan (FCX), Glencore (GLNCY), and Anglo American (AAUKY) also suspended their dividends (DVY).
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