A change of pace at BHP
Recommendation
The profit was a record even if you lop a month off the figures, and account for the fortune spent on getting the ill-conceived 'HBI' plant in WA up and running. It doesn't necessarily mean that happy days are here again, especially since the stock has dropped 5.4% since our issue 57 review (Accumulate - $19.60).
Thanks to Opec
Many claim that BHP owes its success principally to the high price of oil. It was barely US$12 a barrel when Anderson first started the chainsaws in late 1998. Now it's around US$30 a barrel as a result of static production and greater demand from a booming US economy.
BHP disagrees and says higher commodity prices are only part of the happy equation. It says that, after tax, the price rises kicked in just $230m, whereas the starting up of new operations made the company $125m richer. Cost reduction also did its part – including a sizeable pay-down of debt.
This is the background to a new phase in BHP's life. The company is now back in expansion mode - although any sudden cooling off in the price of oil may slow that down for a while and will knock holes in the carefully constructed models which have led BHP into two large oil and gas projects in Algeria. But that remains in the future. If you have any reservations at all, there is no need to rush out and buy. Indeed there is a good case for waiting for weakness to get in - a slip in the oil price would provide a good opportunity - that is why we recommend you ACCUMULATE on weakness rather than buy immediately.