Lower Debt, Investment to Aid BHP Billiton Despite Headwinds
On Sep 10, we issued an updated research report on BHP Billiton Limited BHP. Increased cash generation, lower debt levels and higher operational efficacy are likely to strengthen BHP Billiton’s competency in the near term. However, headwinds like stiff mining market rivalry and oversupply situation in the market might weigh on the company’s results in the quarters ahead.
Let's delve a little deeper into the fundamental factors of the stock.
Strong Cash Flow Aids Debt Repayment
In fiscal 2018, the company generated free cash flow of $12.5 billion — the second consecutive year above $12 billion — backed by robust operational performance and higher prices. It is steadily lowering debt, with increased cash generation. As of fiscal 2018 end, net debt was at $10.9 billion, down from $16.3 billion as of fiscal 2017 end and $26.1 billion as of fiscal 2016 end, reflecting capital discipline and strong free cash flow. The company intends to keep its net debt at the lower end of its target of $10-$15 billion.
The company also remains focused on providing increased returns to shareholders through robust dividend payments. The company will pay a record dividend of 63 cents per share, which includes an additional amount of 17 cents per share, above 50% minimum payout policy (equivalent to $0.9 billion).
Investments Paving the Way for Growth
At the end of fiscal 2018 end, BHP Billiton had five major projects under development in petroleum, copper, iron ore and potash, with a combined budget of $10.6 billion over the span of the projects.
In June, BHP Billiton announced that its board has approved capital investment of $2.9 billion in the South Flank project in central Pilbara, Western Australia. With this, the company added a major project to its portfolio. The project will replace production from the 80 million ton per annum (Mtpa) Yandi mine when it reaches the end of its economic life. It is due to become operational by 2021 and expected to produce ore for more than 25 years.
Recently, BHP Billiton has entered an agreement to acquire 6.1% interest in SolGold Plc for $35 million. With this, BHP Billiton will gain shares in SolGold’s flagship Cascabel porphyry copper-gold project in Ecuador. It is claimed to be a highly prospective deposit, with indicated and inferred resources of 1.08 billion tons (Bt) at 0.68% copper equivalent, with a contained metal content of 5.2 million tons (Mt) of copper and 12.3 million ounces of gold. This is in sync with the company’s strategy to invest in copper assets to capitalize on the long-term fundamentals of the metal.
Simplified Portfolio to Generate Shareholder Returns
BHP has entered into agreements for the sale of its entire interests in the Eagle Ford, Haynesville, Permian and Fayetteville Onshore US oil and gas assets for a combined consideration of $10.8 billion, payable in cash. The sale of the onshore U.S. assets is consistent with its long-term plan to continue to simplify and strengthen its portfolio to generate shareholder value and returns. BHP Billiton plans to return the net proceeds from the transactions to shareholders. In addition to the demerger of South32, BHP has announced or completed more than $18 billion of divestments over the last six years.
Over the past year, BHP Billiton’s shares dipped 0.2%, compared with the industry’s decline of 8%.
What’s Hurting the Stock?
BHP Billiton’s productivity gains guidance is at approximately $1 billion for financial year 2019, with strong momentum carried into financial year 2020. This guidance is lowered from $2 billion over the two years to the end of financial year 2019, due to the announced divestments. In the short term, supply growth from seaborne high-quality iron ore suppliers and ample low-grade inventories at Chinese ports are expected to put a cap on iron-ore prices.
Moreover, other industry-specific headwinds such as unfavorable government mining policies and an oversupply situation in the market or stiff business rivalry remain causes of concern for the company.
BHP Billiton currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector are Celanese Corporation CE, Ingevity Corporation NGVT and KapStone Paper and Packaging Corporation KS. While Celanese and Ingevity sport a Zacks Rank #1 (Strong Buy), KapStone Paper and Packaging carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Celanese has a long-term earnings growth rate of 10%. The stock has gained 15% in a year’s time.
KapStone Paper has a long-term earnings growth rate of 10%. The stock has rallied 48% in a year’s time.
Ingevity has a long-term earnings growth rate of 10%. The stock has appreciated 65% in a year’s time.
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