23 November 2019
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BHP creeps back into fashion

Andrew Main
23 August 2017

By Andrew Main

For a company that dropped short of the analysts’ earnings estimates by a lazy $US600 million, BHP came out of yesterday’s full-year numbers announcement looking pretty damn popular with lesser beings such as investors.

The big miner’s shares kicked up 35 cents at the opening to $26.05 despite the fact that the $US6.73 billion underlying profit number was below the analyst consensus of $US7.3 billion. This was compared with a previous equivalent number of $US1.2 billion. The shares traded fairly steadily through the afternoon to close 28 cents or 1.1% higher at $25.98.

BHP Billiton CEO Andrew Mackenzie. Source: AAP.

You can pick a spread of reasons why investors liked the newer numbers.

One, the company cranked up its final dividend from US14c to US43c. Put another way, the overall dividend payout lifted by 175% to $US4.4 billion and, as management loudly pointed out, that figure was well covered by earnings.

BHP’s 50% minimum payout policy would have paid out US33 cents at that level, so the decision to kick in an extra US10c a share to US43c was hardly lavish and will go down like an oyster with dividend-hungry investors.

Two, as stated above, underlying profit was up nicely. Free cash flow was up a dazzling 274% at $US 12.6 billion, the second highest ever achieved.

It wasn’t all canny management, of course. The relative weakness in the Aussie dollar and better-than-previous prices for coal and iron ore, the company’s mainstay products, clearly played a part in the positive result.

At the same time, net debt was cut during the year by almost $US9.8 billion or 40% to $US16.3 billion. You get the drift. BHP’s been focusing on sweating its assets and not diving off on any supposedly exciting new projects.

As retiring chairman Jac Nasser put it yesterday, over the last five years, the company has reduced unit costs by more than 40% and achieved more than $US12 billion in productivity gains, and he’s not even Scottish like CEO Andrew McKenzie, he of the “laser-like focus on costs”.

Just to amplify that theme, he noted that capital and exploration in the next three years won’t exceed $US8 billion a year. The latest year’s outlay of $US5.2 billion was a cut of 32% from the 2016 year’s total and while the current year will see around $US6.9 billion being spent, that’s clearly indicative of a cautious trend and retail shareholders generally cheer for caution, particularly in resource companies.

As Nasser put it, “we have reshaped our portfolio so that we focus on large, long life low cost assets that will support shareholder returns for decades to come.”

Buy that man a kilt, or tartan trousers if that’s a bridge too far.

But perhaps the strongest element for investors was the absence of bad news. Bear in mind that the previous 2016 financial year had seen the failure of the Samarco dam in Brazil in November 2015, a writedown of US onshore assets  and various global tax issues, helping produce an exceptional post tax loss of $US7.6 billion.

This latest year’s equivalent total for one-offs was a mere $US842 million, which by comparison is the sort of change you find down the back of the couch.

This year’s adjustment covered further reparation payouts over the Samarco disaster, a strike at the Escondida copper mine in Chile, and a fight with the Chilean tax authorities over withholding tax. Mackenzie could be forgiven for taking a pair of scissors to his map of South America in a bid to sleep better. Samarco alone accounted for $US381 million or close to half the annual total for exceptional losses.

They’re getting close to ending the Samarco horror but there still has to be a final settlement with the Federal Prosecutor’s Office in Brazil. That was supposed to have happened before June 30 of this year but that’s been extended out to October 30.

The element of the results announcement that professional BHP watchers liked most was that the company is getting out of onshore US operations, the millstone that the company hung around its neck in 2011 on an outlay of around $US20 billion.

It’s already written down the ill-fated shale assets by more than $US10 billion, most of that in January of last year, so as long as the company can get out at half of its entry price, the damage won’t be too bad. Isn’t hindsight a wonderful thing?

That decision lines up with the main recommendation of activist shareholder Elliott Management, the US group which has been calling on BHP to dump its shale business. It also wants an overhaul of BHPs petroleum business but one thing at a time, please.

Elliott now has a shareholding of just over 5% in BHP so it can call an extraordinary meeting any time.

Bearing in mind that the best activist shareholders are more interested in results than confrontation, Elliott could have had a win without firing a shot.

The test of this will be whether the BHP share price moves up in expectation of that shale business disposal. Certainly the trend’s looking positive.

BHP shares hit a recent low of $14.20 at the start of last year then ran up to a high of $27.89 at the start of this year. A recent dip to $22.10 in June has been followed by a mild rally to current levels, where brokers are fairly evenly divided between neutral and positive views.

BHP Billiton 1-year chart

Source: CommSec

In summary, BHP is creeping tentatively back into fashion and yesterday’s announcement will have helped the trend.

There are a million things that can still go wrong but as the old saw goes, the trend is your Friend.

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