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2 top resource stocks: BHP Billiton Limited and Oil Search Limited

Aug 30, 2015 | Team Kalkine

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BHP Billiton

First Production from Three projects: BHP Billiton Limited (ASX: BHP) overall production rose 9% on year over year (yoy) basis in the fiscal year 2015, boosted by the first production from theEscondida organic growth project, Stage three expansion of BMA hay point as well as Escondida oxide leach area project production which contributed to the overall production increase. As per the segment highlights, the group’s petroleum production surged 4% yoy to 256 mmboe driven by the Onshore US liquids volumes growth, while the copper production remained at 1.7mt for the year impacted by the mill outage at Olympic dam despite better production at Escondida. BHP Billiton’s iron ore production grew 14% yoy to 233 mt in FY15 driven by the 13% yoy increase in Western Australia iron ore production (WAIO).

BHP Daily Chart (Source - Thomson Reuters)

Profitability Pressure: Despite the increase in production, the company’s earnings before interest and tax plunged by USD 382 million during the financial year 2015, against USD 73 million increase in 2014 financial year, affected by the declining commodity prices which resulted in the fall in average realized prices. BHP Billiton’s iron ore and coal prices are linked to the index price for the month of the shipment. As a result, the Iron ore, Oil (crude and condensate) and copper average realized prices fell 41%, 33% and 14% respectively in FY15, as compared to the earlier fiscal year. The group revalued 363 kt of outstanding copper sales at June 30, 2015, at average price of USD2.61 per pound.

BHP Portfolio (Source - Thomson Reuters)

Stock Performance: BHP Billiton touched a peak price of $34.12 on March 2. However, the stock was not able to withstand this level and have been falling since than owed to pressure coming from commodity prices like iron ore, copper and oil. Moreover, BHP’s impairment charges related to demerger of South32 and falling Australian dollar also contributed to the decrease in profits. Additionally the group gave a very conservative fiscal year 2016 guidance, wherein it is decreasing its copper, petroleum and metallurgical coal production by 12%, 7% and 6% respectively. But, Investors should note that after demerging South32, BHP has improved its focus on operational efficiencies for its core assets portfolio, offering some respite to its profitability for the coming years. Moreover, we believe that the stock is trading in an oversold zone, which posted a negative returns of over 18% in the last six months. This correction offers opportunity to investors looking for cheap value dividend stocks. BHP is trading at a cheaper P/E of 10.28 x, and has a solid dividend yield of 5.89%. Based on the foregoing, we reiterate our “BUY” recommendation to the stock at the current levels of $25.49.

Oil Search

Second Quarter Performance: Oil Search Limited (ASX: OSH) reported a record second quarter of 2015 performance, delivering a 7% yoy increase in total production to 7.41 million barrels of oil equivalent (mmboe), driven by PNG LNG Project which contributed 5.67 mmboe (24.7 bcf LNG and 0.83 mmbbl liquids), while the production from the base PNG oil and gas business was 1.74 mmboe. But, the group’s total revenue for this quarter fell to USD 391.5 million, against USD 472.3 million during the first quarter of 2015, impacted by falling average realized LNG and gas price by 35% to US$8.10 per mmBtu. However, the average realized oil and condensate price improved 20.3% to USD 61.69 per barrel, against the first quarter, and hence the total revenue for the first half of 2015 rose to USD 863.8 million, versus USD 510.0 million in the first half of 2014. Meanwhile, Oil Search Limited announced that Total E&P PNG is now the operator for the PRL 15 Joint Venture from August 1, 2015.

OSH Daily Chart (Source - Thomson Reuters)

Exploration & Drilling Updates: The PNG LNG Project reported 100th LNG cargo during June 2015, and the project had exceeded seven million tonnes of export from April 2014. Antelope 5 appraisal well in PRL 15 production test were positive and showed signs of resource base. Drilling at Antelope 4 appraisal well were scheduled to start this month. PRL 15 Joint Venture that was managed by Total SA chose some major infrastructure sites for the probable future development of the Elk-Antelope gas field. The LNG plant site would to be located at Caution Bay, leveraging the prospects to pursue possible synergies with the PNG LNG Project.

Net Production (Source: Company Reports)

Guidance: The shares of Oil Search fell over 26% over the last six months, impacted by the oil prices and is currently trading near its multiyear lower levels. To offset this pressure coming from the falling oil prices, Oil Search is focusing on efficiencies and cost reductions and estimates a production cost guidance per barrel of oil equivalent to decrease to US$9 - 11/boe, against US$10 - 12/boe. To maintain its profitability, OSH has also improved FY15 production to 27 – 29 mmboe, as compared to earlier estimated range of 26 – 28 mmboe. The group is also making arrangements to drill an appraisal well at the P’nyang field estimated to spud by next year. This positive forecast by the group has the ability to drive the stock higher in the coming months. Moreover, the group has been maintaining a solid cash flow per share from quite a while now. Accordingly, we give a “BUY” recommendation to the stock at the current price of $6.77

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