BHP Group Limited
 

Petroleum Segment Expected to Generate ROCE Above 15% Over Next Decade:BHP Group Limited (ASX: BHP) is involved in minerals exploration, production and processing (particularly coal, iron ore, copper and manganese ore) and hydrocarbon exploration, production and refining. On November 11, 2019, Geraldine Slattery, BHP President Operations Petroleum, highlighted that Petroleum segment has delivered strong financial performance over many years and still has competitive growth potential for the decades to come.Ms Slattery said that in a decarbonising world, deepwater oil and advantaged gas close to established infrastructure can offer competitive returns. The petroleum segment is expected to generate robust EBITDA margin of more than 60%, and an average ROCE is expected to be above 15% over the next decade. It is expected to deliver an average internal rate of return (IRR) of around 25% for major projects and support an average annual volume growth of up to 3% between 2020 and 2030 financial years.

In another update, the company highlighted that Ernst & Young has been appointed as BHP’s external auditor with effect from November 7, 2019, following the resignation of KPMG due to UK and EU requirements on auditor tenure.

September’19 Quarter Key Highlights:Group copper equivalent production for the period decreased by 3% than the previous period, largely due to planned maintenance across a number of operations and natural field decline in Petroleum. Petroleum production for the period stood at 29 MMboe, a decrease of 1% than the previous period. Iron Ore production for the period stood at 61 Mt, a decline of 3% than the previous year.


Quarterly Production and FY20 Guidance (Source: Company Reports)

What to Expect:In September 2019, the company approved an investment of US$283 Mn for the development of the Ruby oil and gas project in Trinidad and Tobago. At the end of September quarter, it had six major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$11.4 Bn over the life of the projects. The Jansen Stage 1 potash project in Canada will be presented to the Board for final investment decision by February 2021.
 
Stock Recommendation:BHP’s share generated a positive YTD return of 15.13%. Gross margin, EBITDA margin, and net margin of the company for FY19 stood at 60.6%, 50.8% and 21.5%, better than the industry median of 42.0%, 29.1% and 11.0%, respectively, implying decent fundamentals of the company. Its ROE for FY19 at 16.8% was better than the industry median of 12.3%. Company’s quality assets and pipeline of competitive growth options are expected to generate decent free cash flow and returns through the 2020s and beyond. Hence, considering the aforesaid facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $37.100, down 0.215% on November 12, 2019.
 

Origin Energy Limited

Integrated Gas Revenue Rose By 7% to $688 Mn in September Quarter:Origin Energy Limited (ASX: ORG) is involved in the operation of energy businesses, including exploration and production of natural gas, electricity generation, wholesale and retail sale of electricity and gas, and sale of liquified natural gas. Recently, the company’s director, Frank Calabria, disposed 570,150 options and 57,739 performance share rights lapsed in accordance with the equity incentive plan rules, with effect from November 4, 2019.

Key Highlights of September’19 Quarter:Within integrated gas, Australia Pacific LNG year-on-year production rose by 3%, driven by higher well availability and the Eurombah Reedy Creek InterConnect pipeline coming online. Integrated Gas revenue in the quarter increased by 7% to $688 Mn, driven by higher effective Australian dollar oil prices and increased LNG volumes. Within the Energy Markets segment, electricity sales were flat on q-o-q but down by 8% on y-o-y basis, primarily due to lower business sales and lower retail customer numbers and usage. Natural gas volumes declined by 7% y-o-y, primarily due to the non-recurrence of short-term wholesale contracts in Queensland.


September’19 Quarter Key Metrics (Source: Company Reports)

What to Expect:Australia Pacific LNG continues to perform strongly with production rising during the quarter and higher oil prices lifting revenues. Energy Markets’ Underlying EBITDA is expected to be in the range of $1.35 Bn to $1.45 Bn. The gross profit of the natural gas portfolio is expected to be relatively stable, while it is estimated that there will be a reduction in electricity gross profit, reflecting the impact of government default market offers, lower green scheme prices flowing through to business customer tariffs and lower customer usage.

Stock Recommendation:ORG’s share generated a positive YTD return of 30.54%. Its current ratio for FY19 stood in-line with the industry median of 1.21x. Its EV/Sales and EV/EBITDA multiples on TTM basis stand at 1.4x and 6.3x, lower than the industry median of 4.0x and 7.6x. Currently, the stock is trading close to its 52-week high levels of $8.310 with PE multiple of 11.99x and an annual dividend yield of 3.03%. Hence, considering the aforesaid facts and current trading levels, we recommend a “Hold” rating on the stock at the current market price of $8.280, up 0.364% on November 12, 2019.

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