BHP Billiton Limited (BUY)
BHP Billiton Limited (ASX: BHP) demerged South32 to enhance concentration on its core portfolio of nineteen assets. The group reported a 9% year over year (yoy) increase in the overall production for the fiscal year 2015 driven by the first production of three major projects- Escondida organic growth project, BMA hay point stage three expansion and Escondida oxide leach area project.
With regards to the segments performance, the petroleum production surged 4% yoy to 256 mmboe on the back of Onshore US liquids volumes growth. BHP Billiton estimates a 19% yoy decrease in the overall production of Haynesville, Fayetteville and Hawkville fields for the fiscal year 2016. The Onshore US liquids volumes delivered outstanding performance during the period, increasing 67% to 56 mmboe, and beating the guidance estimates. Meanwhile, the Natural gas production fell 6% yoy to 787 bcf due to declining demand at Bass Strait and lower onshore US gas volumes during the FY15.
Total iron ore production soared 14% yoy to 233 mt, while the Western Australia iron ore production (WAIO) improved 13% yoy to 254 mt (100% basis), driven by the better output across the integrated supply chain. The group forecasts the full year iron ore production to grow by 6% yoy to 247 mt in 2016 and WAIO is expected to grow to 270 mt (100% basis) by next year, boosted by improving processing efficiency at Mining area C and Newman.
Production Guidance for 2016 (Source: Company Reports)
BHP Billiton Onshore US drilling and development had incurred an expenditure of USD 3.7 billion for the fiscal year 2015, and the group expects to spend further amount of around USD 1.5 billion for the next financial year. On the other hand, in spite of the yearly shale investment cut of over 50%, the firm intends to maintain production in the black hawk and Permian driven by decreasing drilling costs and improved recoveries.
The group’s stock have corrected over 27.4% since it touched a peak price of $34.12 during this year, on March 2nd. The fall was mainly due to the falling iron ore, copper and Oil prices, as the group’s commodities are linked to the index price for the shipment. Consequently, the Iron ore, Oil (crude and condensate) and copper average realized prices plunged 24%, 39% and 12% during the second half of the fiscal year 2015, as compared to first half of 2015. The company also decreased the Onshore US rig count to 10 during the fiscal year from 10 in FY14, due to the falling prices. BHP estimates its iron ore cost to decrease to US$16 per tonne for the next financial year.
However, with stock trading just above approximately 6.5% of its multi-year lows, we believe that it is now poised to raise to higher levels, driven by the operational efficiencies. Improving commodity prices might also add support to the stock. Moreover, despite falling iron ore costs estimates for the next year, the group will be able to maintain competitive margins. The stock has a competitive P/E at 10.92 x, better than its industry peers and a dividend yield of 6.48%. Based on the foregoing, we give a “BUY” recommendation to the BHP Billiton at the current levels of $25.90.
South32 Limited (BUY)
South32 Ltd (ASX: S32) recently reported a decent performance for the fourth quarter of 2015 financial year driven by the Illawarra Metallurgical coal, Saleable alumina at Brazil aluminum, Australia Manganese and South Africa Manganese Ore productions. The group’s total metallurgical coal production, lead production and Zinc production surged 23%, 10% and 19% respectively during the quarter, as compared to the previous quarter. However, the manganese alloy and nickel productions were under pressure, witnessing a decline of 26% and 19% respectively, as compared to the third quarter of 2015 financial year.
Production highlights for fourth quarter of 2015 and Fiscal year 2015 (Source: Company Reports)
South32 got a stable outlook from S&P and Moody’s, who allotted BBB+ and Baa1 credit ratings, and has a net cash of USD 54 million. The group is making efforts to achieve a solid operational efficiency in the coming years, after demerging from BHP on May 2015.
The company started trading on ASX from May 18
th and touched a high of $2.45 on May. However, the falling commodity prices coupled with profit booking by investors (as each BHP Billiton shareholder received a share in South32) have beaten down its share prices by 13.3% since its listing. On the other hand, we believe that the selling by the investors is almost finished, and the stock is poised to grow higher in the coming months. But, investors need to withstand the risks associated with the commodity price fluctuations, to derive good returns from the stock. Having an attractive P/E at 13.86x, we recommend a “BUY” on the stock, at the current levels of $1.715.
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