BHP Billiton Share Discussion Threads

[revell40] 01/2/2016 17:39

I think you may get £3 Rick

[rickmay] 01/2/2016 15:39

Still on Target £2 to £3

[idioterna] 01/2/2016 15:12

I don't think he'll be much of a star just for calling an end to the beat-up-BLT season. Cyclical sectors are exactly that, it doesn't take genius.

[closetinvestor] 30/1/2016 16:58

Thanks Gateside. From the link -

"Brandon is a rising junior in the Gabelli School of Business at Fordham University. He is striving to obtain a career in investment banking or trading..."

Good luck to Brandon. One way of getting that career he is looking for, is to make a bold call on commodities, which if it comes off makes him look like a star. On the other hand, an alternate outcome could be the end of his career before it's even started.

[gateside] 30/1/2016 15:15

It's from the following website

[closetinvestor] 30/1/2016 10:43

@loganair - Who is Brandon Dempster?

[loganair] 29/1/2016 13:46

Why I Bought BHP Billiton by Brandon Dempster:

Summary:

•BHP Billiton has been bogged down for several years now on the back of lower commodities prices.

•However, this large-cap company has been steadfast in the face of cutting production and is protecting its market share even in a down market.

•The current yield could potentially be in jeopardy if fundamentals worsen, but I do not expect a full cut.


BHP Billiton is my top iron ore pick for 2016. Unlike lower-cost competitors like Vale and Cliffs Natural Resources. Being able to trade BHP is going to largely depend on my ability to understand the short-term catalysts surrounding iron ore prices, but keeping in mind the longer-term opportunity. The increased volatility in January has begun to be a nightmare for traders and creating visibility on BHP has been incredibly difficult. With an improved risk/reward scenario, potential supply-side reform coming from China, and incremental curtailments from other producers, we're starting to see some bullish support for the company.

Potential Catalysts:

There's a lot of fear in the iron ore industry right now that the low level prices are creating instability and two targets, BHP and Rio Tinto (NYSE:RIO) are consistently on watch due to their exceptional balance sheets and cost management. Here's the best part about BHP: they are realistic with their expectations. If currency and commodity headwinds persist or even if prices stay at current levels, this company is going to see downward pressure. Last week, the company said that they do not expect a recovery in iron ore in 2016, which is largely the consensus. The largest fear, however, comes from the World Bank with the expectation that "lower for longer" iron ore prices will persist through 2020, only hitting $50 (62% Fe) at that point.


Samarco was a complete disaster, but nonetheless an anomaly. Looking forward, the proposed $4.8 billion fine is going to cause a large impairment on BHP's books. Not only that, but the loss of the Samarco JV in future quarters will be reducing the top-line. Is that necessarily priced into expectations? That's hard to say considering BHP's correlation to iron ore prices, so we'll gain more color on that on the next ER. Furthermore, we'll likely get more visibility on this settlement amount next month.

With the exception of iron ore, BHP Billiton did post lower production levels for metallurgical coal, petroleum, copper and energy coal. These were naturally due to price weaknesses as well as several one-time factors. I'd expect BHP in future quarters to diversify out of energy coal and make up the ground in petroleum and copper, according to their guidance, as coal has largely seen the worst decline in the last 18 months.

A key takeaway from this recent operating update is that BHP has three major projects under development set to boost the top-line and that's one of my primary motivations behind buying the stock. It comes at a time where smaller producers are already in a bind with a gluttonous oversupply in the market and cannot afford to have prices take another dip. Furthermore, I believe we'll begin to see BHP take the direction of other competitors like Fortescue Metals in the aggressive cost-cutting and decreasing leverage in order to have a lower break even per ton level.

We're also starting to see incremental support for iron ore prices. The speculation that China can push supply-side reform is hanging in the back of traders' minds. Until we can see efficacy from China on that front, iron ore prices will be volatile and so will BHP's equity. While I believe we'll see some support in 2016, I believe it is going to take the exit of one of the smaller players, like Vale or Cliffs for a real rebalance to occur, especially when we have Fortescue projecting to increase shipments this year. Furthermore, we saw Vale close down its Tubarao port due to environmental issues, which was crucial in setting a ST bottom.

Iron ore is currently trading at $40.85 on the Globex, which is up slightly from the dip we saw over the last two months. While expect much volatility moving forward, the pressure will be on China to announce the specifics behind their supply-side reform plans and ideally, IO prices will start to see more stable, longer-lived upside.

The extent to which BHP has curtailed production is drastically better than its competitors, too. BHP has released full year guidance that it will decrease iron ore production by 10 million tonnes to 237 million tonnes, but it should be noted that this wasn't by choice as this is the production loss from Samarco. BHP can afford to keep increasing production in the face of other players. Staying steadfast with production and maintaining market share is one of the other key reasons why I like BHP through this downturn.

Trading At Current Levels:

The most immediate thing I noticed was the improved risk/reward scenario after suffering a 45.81% loss in 2015 and already 17.12% loss in 2016. While I'm largely a pessimist on commodities until China truly pushes supply-side reform, I'll likely be staying long with a portion of these shares and day trading some sort of allocated remainder just for some incremental profit potential. That being said, we can really see the aggravated decline the shares have taken in last few months, but notice where my trade is taking place - at nearly the 52-week lows. That's an excellent justification for a long trade on an improved risk/reward mindset, as well as with the stock trailing its moving averages so heavily.

Certainly, there could be some very negative events this year for BHP shareholders, notably a potential dilution through an additional capital raise. Since Moody's put BHP on credit review last month, everyone is uneasy about this company's liquidity. The additional capital raise could amount to $15.4 billion, which would likely rattle the equity. This is a company with a solid A rating from Moody's, well above the Baa3 from competitor Vale, who's on credit watch for being downgraded to junk. Now, the review really revolves around the commodity price risk, but it should be noted that they expect BHP's debt/EBITDA to increase 2.0-2.5x by summer 2018. If BHP can combat this and effectively reduce debt not at the expense of liquidity, they will maintain their solid credit rating.

Naturally, another consideration I have to maintain is the AUD/USD as BHP has experienced FX losses in past earnings reports. While we can expect the pair to largely be influenced by commodity prices as well as the rate hike pacing of the Federal Reserve, it remains that this depreciation against the dollar has cut into BHP's earnings.

Dividend At Risk?

The stock is current yielding 11.49%, a substantial yield for a commodities company, let alone any company. The payout ratio is lofty at 240.8%, but grew 2.5% YOY. BHP is different from other public companies in that they report earnings every six months, so they report a much larger distribution each earnings report. There are currently many pessimists when it comes to BHP's high yield and rightly so given the current state of iron ore and other commodity prices, but I think their concerns are merited at this point in the downturn. Why would BHP cut now and not months ago like other commodities companies, especially with solid liquidity and a strong credit rating?


Historically, the ex-dividend dates have been in the first half of March, as well as the first half of September. That means there's still more than an adequate amount of time for investors to tack on a solid first half yield. If we continue to see iron ore test new bottoms, then there is going to be a swelling of speculation as whether or not BHP will cut their dividend to preserve liquidity.

Conclusion:

The long-term investment with BHP continually looks attractive. An improved risk/reward scenario justifies a long entry, but my largest concern is that I'm in place too early. I believe iron ore is attempting to find a bottom and there's much more limited downside risk with an investment in BHP Billiton.

[sogoesit] 29/1/2016 09:45

Meanwhile my short (Fear and Greed combined :-) ) has been sorely tested above 681 this last day or so... but for no understandable reason has just gone into the money.
I shall now return to my retrospective reflection (I like the alliteration) or my erring...:-)

[tpaulbeaumont] 29/1/2016 09:11

quite sogoesit, it was in fairness a rhetorical question highlighting the fickle whimsy of the herd and possibly inducing some retrospective reflection :P

to err is human :)

[sogoesit] 28/1/2016 15:55

Fear and Greed, simple!

[tpaulbeaumont] 28/1/2016 11:46

new year and new polar shift on the panel from 'its bottomed its bottomed its bottomed' to 'its going to £2 or so' :P anyone wonder why markets apparently 'overshoot'?

[idioterna] 27/1/2016 12:50

Thanks for the excellent post Sogoesit. I might not agree with every detail but it's close enough to approve. One aspect I do find interesting is the credit rating clamour. Sure you need a decent rating but as far as I knew the rating agencies have never had a problem with understanding the cyclical nature of the mining sector. To say they are now worried smacks of either incompetence or pressure from investment bankers. Since our credit lines look fine for the next couple of years, if, and it's a big if, BLT were to be downgraded a notch that would entail absolute disaster for the rest of the sector since most of them are surviving on paying off interest alone. It's not BLT that would be hurt by such a downgrade, it'll signal the end of the line for an awful lot of production. Kind of what BLT is looking for anyway.

[loganair] 27/1/2016 11:15

When it comes to the price of oil...it is reported that by 2020 3.6mln bpd will be taken off the market due to depleted oil fields while only 1.7mln bpd of new oil is expected to come on stream.

Overall, the current price of oil is no good for the world economy, it is far to low. There is a sweet spot for the oil price which I hear is some where between $55 and $65 per barrel.

[loganair] 26/1/2016 20:02

By G A Chester - BHP Billiton

Size, diversification and relatively low gearing of 26% give the world’s biggest miner BHP Billiton a strong position in the survival stakes. With the shares more than 60% below their 52-week high, and more than 75% below their all-time peak, the long-term upside potential for investors today is considerable.

Of course, the short-term could be stressful. It’s possible Billiton’s shares may fall further before turning north. And one thing investors today shouldn’t bank on is a continuation of the dividend at last year’s level, which gives a yield well into double figures. Billiton’s Board has so far been reluctant to tarnish the company’s proud dividend history with a cut. But I believe management will demonstrate it’s putting prudence ahead of vanity by at least halving the payout — and possibly suspending it altogether — at the interim results on 23 February.

Investors today shouldn’t be looking for an immediate substantial uplift in the shares and dividend, but to be rewarded with both over the longer term.

[brutus8] 24/1/2016 11:20

IMHO buying distressed assets without knowing what the future holds is a mistake. We should look at diversity as have many oil companies and get on the alternative energy boat with fuel cells, hydrogen & technology branding in futuristic house building and infrastructure optimising resource consumption.Just digging stuff out is no longer supported by governments. They want innovative ideas to support the ever growing world population and the enthasis is: GROWING.This is just a correction which also carries a warning: innovate or die.

[sogoesit] 24/1/2016 00:37

Indeed it would, as a strategy, logan. My issue is with the execution, and, where do they get the money from (new equity?).

Anyway, I wonder what full year 2016 valuation might look like given the half year report information?
We know the dividend is unsustainable as it was 124c for an EPS of 120.7c in FY 2015. If not unsustainable it is certainly not prudent based on prior years' payout ratios and the capital structure.
So what might the dividend look like when re-adjusted to meet reality?

Applying proportionate factors for changes in production and changes in price, as follows:
Production changes:
Petroleum: -7.5%
Iron Ore: +1.0%
Copper: -4.0%
Coal: no change

Price changes:
Petroleum: -56%
Iron Ore: -34%
Copper: -29%
Coal: -41%

to the FY 2015 Gross Revenue of $44,636bn I get $26,466bn.

With a 7.8% net margin constant that makes $2,065bn for continuing operations (ie not including write-downs which may have to be funded by a capital raise and we don't know the Samarco outcome yet).

A net profit for continuing operations of $2,065bn gives EPS of 39c/share.
If we assume a payout ratio of 50% (the pre-2015 historic ratio) at best we get a DPS of about 19c (cost of about $1bn). But they might re-start at less than 50% in order to then give room for a "progressive" dividend policy.
Being generous lets assume we award it a 5% yield that gives us a forecast share price of $3.88 or 272p at an exchange rate of $1.425/£. (A 6.5% yield gives $2.99 or 210p per share).

Of course it might get worse... I don't think it gets better unless there's a short term reversal in most commodities prices or they use cash or other means to finance a different (higher) dividend (disposals not acquisitions?)....

[loganair] 23/1/2016 09:00

In the long term in my good opinion it would be an excellent thing for BHP to pick up good solid assets at distressed prices.

[sogoesit] 22/1/2016 18:30

Last para makes a lot of sense but don't understand your complex view about BLT.

If BLT started acquiring "distressed assets" the share price would plummet imv.
They certainly don't have a good record on acquiring quality assets in the o&g business (who knows Shell have some trash to sell them) and it's too early in the cycle to be thinking about minerals. The Pilbara is pretty competitive if anyone wants to accumulate more there.

Am short BLT.

[idioterna] 22/1/2016 14:06

Just compare that update to Anglo Americans'. You can only surmise that the investment bankers are talking down the dividend for one reason: To convince Billiton to acquire "distressed" assets. There are only two possible reasons for that:

1. The investment bankers make an absolute packet from mergers and acquisitions.
2. The investment bankers represent banks that have loaned money to these idiots in tar sands, shale gas & mining sector and desperately want that money from Billiton via acquisitions.

So shareholders don't see the rewards, only the investment banks. GTFOH!

It's so perverse even Bill Clinton must shudder. Repealing the Glass-Stegal entailed the democratic middle class (who he & Hilary claim to represent), must bend over and be shafted by the Investment Banker. Basically it's the Democrats that represent the super-rich, not Trump and the Republicans. Amazing.

[idioterna] 22/1/2016 13:49

The trading update is excellent. Billiton is not a company in trouble from weak commodity prices and there is no reason to cut the dividend. So much for the speculation, there is at least another 30% upside before the February update and that should see a return to $30+.

[anley] 22/1/2016 10:03

Look at the announcement about a possible Brazil settlement..........having to pop out so may post later today.........

[essentialinvestor] 22/1/2016 08:25

NPP, you beat me to it, sorry I did not see your post )