BHP: Oil, Mining & Dividend Underappreciated? - Barron's (blog)

By Dimitra DeFotis

BHP Billiton (BHP) shares were up 2.3% Tuesday after Jefferies said the mining and energy company should get a lift from rising oil prices.

BHP’s energy assets include oil-and-gas properties across Australia, four U.S. shale plays, wells in the U.S. Gulf of Mexico, as well as production in Trinidad and Tobago, Algeria, Pakistan, and the United Kingdom. BHP spent $4.8 billion in cash in early 2011 to acquire Chesapeake Energy (CHK) natural gas interests in the Fayetteville shale, including pipelines. The timing wasn’t good as commodity prices tumbled, and many have questioned the company’s energy investments. But now that the U.S. oil price is hovering near $50 per barrel, Jefferies analysts Christopher LaFemina, Timothy A. Ward and Patricia Hove say the petroleum business would benefit from a sustained lift in oil prices, and that mining assets are “underappreciated.” A Federal Reserve rate hike could depress commodity prices in the short term, but they expect a recovery in the first quarter of 2017 from seasonal factors and a dividend boost next year. They write:

“BHP has some of the world’s best mining assets. It also has a petroleum business that is positioned for a longer-term recovery in energy prices. The embedded value within BHP’s mining assets is underappreciated, as is its cash generation and potential capital returns even in a weaker environment. Macro risk is an issue, but there is further upside to BLT on a 2-3 year horizon. Tier-1 Mining Assets: As discussed in detail herein, BHP has some of the highest quality assets in the global mining industry. Unlike most other miners, BHP has significant organic growth optionality as a result of the quality and scale of its resources. We estimate that there is at least $18 billion of potential value from long-term growth within the BHP portfolio. Our NPV estimate including this growth is 1619p per BLT share ($39.48 per ADR). Near-term growth at Antamina, Escondida, Spence, and Queensland Coal is underappreciated … In February, BHP abandoned its progressive dividend policy and switched to a >50% payout ratio. BHP’s cash flow has strongly recovered since then. … We forecast a $0.67/share fiscal 2017 dividend (100% payout, 4.6% yield), but there is upside to this if commodity prices do not materially decline. We expect dividend growth and consensus EPS upgrades for BHP after fiscal 2017.”

The U.S.-traded ADR was recently changing hands at $34.64. Citigroup last week  downgraded mining giants BHP and Rio Tinto (RIO) Thursday, citing the impact of slack China commodities demand and monetary woes on pricing. Shares of the companies and Brazil’s VALE (VALE) tumbled.

Jefferies analysts have a hold rating on Glencore (GLNCY) and Vale, and Buy ratings on Rio and BHP. Shares of Glencore were up 4.5% in recent trading, while Vale and Rio shares were up 1.9%.