BHP swings to FY17 profit, to divest shale properties

The stock of BHP Billiton Ltd (NYSE: BHP), the world’s largest miner by market capitalization, recorded a new yearly high of $44.24 on the 1st of September, after the company posted fiscal 2017 underlying net profit that increased more than five times compared to fiscal 2016. The company also tripled its annual dividend.

However, both the dividend and underlying profits were below analysts’ expectations.

Even though the fiscal 2017 results are impressive, still, we expect the stock to decline in the short-term due to reasons given below.

The Melbourne-based company a swing to profit of $5.89 billion on revenues of $38.29 billion in the fiscal 2017, from a net loss of $6.39 billion on revenues of $30.91 billion in the full-year 2016.

Last year, BHP took an impairment charge related to the 2015 dam failure at Samarco iron-operation in Brazil and US oil and gas business.

BHP

Underlying attributable profit in the year ended June 2017 was $6.73 billion, or 126.5 cents, up 454% from $1.215 billion, or 22.80 cents, in the year ended June 2016. Analysts polled by Thomson Reuters had anticipated earnings of $7.40 billion for fiscal 2017.

The company benefited from a 32% jump in the price of iron ore in fiscal 2017, mainly due to an increase in demand from Chinese steel mills. Price of other commodities such as copper, coal, oil, and nickel has also gone up, leading to better performance.

BHP Billiton generated $19.4 billion in cash from operations, up 52.9% on y-o-y basis. Capital and exploration expenditure declined to $5.20 billion, from $7.70 billion in the prior-year period.

The company declared a final dividend of $0.43 for fiscal 2017, against $0.14 declared last year. That took the dividend tally to $0.83 per share for FY17. It was below the expectations of shareholders. However, investors and analysts were pleased to hear that the company had reduced its debt by $9.80 billion to $16.32 billion.

To the relief of fund managers, including Elliott Management and Tribeca, BHP announced that it would divest its stake in the underperforming US shale business. The shale oil and gas properties of BHP Billiton extends over an area of 838,000 acres encompassing Permian, Eagle Ford, Fayetteville, and Haynesvlle regions of the US. Analysts have estimated that the property would only fetch half of the $20 billion investment made by BHP to acquire it.

BHP Billiton ended fiscal 2017 with cash and cash equivalents of $14.20 billion, up from $10.30 billion in the previous fiscal year. The company’s interest-bearing liabilities were $29.20 billion, down from $31.80 billion in the previous fiscal year.

The company is trading at a forward EV-to-EBITDA multiple of 6.1x. Its competitors Rio Tinto and Vale are trading at multiples of 5.8x and 4.3x. Furthermore, analysts have issued a weak 2018 outlook for iron ore, on the basis of a stable to weak demand from China. The stock is also trading above analysts target price range of between $38.70 and $41.70. Thus, fundamentally, we forecast a correction in the stock price, from the current level.

As shown in the chart below, the stock has formed a shooting star candle pattern, which signals a bearish reversal. Furthermore, the MACD indicator has started to descend towards the zero line, with mainline below the signal line. Thus, we can expect the stock to re-test the support level at 41.70.

We wish to position ourselves to gain from the probable decline, by purchasing a put option from a trusted binary broker listed here. The entry would be made when the stock trades near $44 in the NYSE.

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