BHP goes with the cash flow

The scale and diversity of BHP Billiton's portfolio, including potentially lucrative US gas assets, give it more capital options than its peers and will bolster the resilience of its cash flows.

The ‘less is more’ philosophy is now firmly ingrained across the big end of the resources sector. At BHP Petroleum’s investor briefing in Houston overnight, Andrew Mackenzie provided a telling insight into how much BHP Billiton hopes to achieve and how much less it plans to spend.

BHP Billiton is coming off a massive peak in capital expenditures during the boom years. Last financial year it had an extraordinary $US21.7 billion ($A23.85 billion) of capital expenditures as it brought 18 mainly brownfields projects towards completion, most of which will start production later this financial year.

The attack on costs evident in the $US2.7 billion reduction in controllable costs last year will continue, but the real focus is on lifting productivity and reducing capital intensity.

On a copper-equivalent basis, BHP Billiton is targeting a compound annual growth rate in production across its portfolio of eight per cent over the next two years – double that achieved in the previous decade.

The iron ore division is expected to increase its output 13 per cent this year and contributed the larger share (37 per cent) of the increase in production, while metallurgical coal production growth is expected to be 9 per cent. Copper and energy coal production (the energy sector undergoing the most adverse structural change) are expected to be quite flat. Petroleum will contribute nearly a third of the growth in volumes.

At the same time it says capital and exploration expenditure will fall 25 per cent this year and will be reduced further beyond that, with future investment directed toward lower-risk brownfields projects with high returns on the capital committed. The exception is the continuing investment of about $US800 million a year in the Jansen potash option, which Mackenzie sees as a potential ‘fifth pillar’ in the BHP Billiton portfolio.

The mantra within BHP Billiton is that there is now real competition for a more limited supply of capital as Mackenzie seeks to both lift the returns on capital while significantly increasing the group’s free cash flow.

While that’s very similar to the macro-strategies being pursued by its peers, the sheer scale and diversity of the BHP Billiton portfolio means that there are more options and more competition for the available capital, as well as greater resilience in the underlying cash flows.

As Mackenzie said, the deep introspection around the strategies now being pursued has the potential to create more value.

With all of its operations now on the same information management platform, BHP Billiton has a unique ability to pursue a business-simplification, cost-reduction and best-practice program across its portfolio.

The big blip in BHP Billiton’s capital expenditures in recent years was the $US20 billion plunge into the US shale gas sector – a capital-intensive business. It crimped its free cash flows and put debt into its balance sheet.

BHP Billiton has been focusing primarily on liquids-rich gas with quick paybacks, but remains confident both about the long-term demand outlook for its energy businesses and for its US gas assets. These assets have added to the diversity of the energy portfolio and given the group an exposure to the world’s largest gas market at a time when US energy policy favours gas and when the gathering momentum of a US recovery should underpin increases in industrial demand for gas.

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