BHP Billiton: Interim result 2013
Recommendation
Only in a mining business can halving profits be proclaimed an outstanding outcome. BHP Billiton’s interim result was one such example. Revenue for the half year fell 14% to US$32bn while reported net profit fell 58% to US$4.2bn. On an underlying basis, that is, excluding US$1.4bn in asset writedowns due to falling commodity prices, net profit fell by a still substantial 43% to US$5.7bn.
Asset writedowns in periods of falling prices aren’t unusual and BHP’s nickel and alumina operations took the brunt of the burden, reflecting dire conditions in those industries. From earnings per share of 107 US cents, down 43%, a fully franked 57 US cent dividend was declared, up just 4%.
H1 2013 | H1 2012 | Change (%) | |
---|---|---|---|
Rev (US$bn) | 32.2 | 37.5 | -14 |
Underlying NPAT (US$bn) | 5.7 | 10.0 | -43 |
Op. cashflow (US$bn) | 6.4 | 12.3 | -48 |
Underlying EPS (USc) | 106.8 | 188.7 | -43 |
DPS (USc) | 57 | 55 | 4 |
Franking (%) | 100 | 100 | n/a |
Once again it was BHP’s iron ore and petroleum divisions delivering the bulk of profits; iron ore contributing US$4.1bn and petroleum generating US$3.1bn of net profit. The struggling aluminium and nickel division lost another US$285m in underlying earnings to accompany the US$66m loss generated this time last year. With more than US$8bn in operating assets tied up in aluminium and nickel, the division is likely to be broken up and sold at some stage.
Second glance
On first inspection, the controversial entry into US shale production appears a failure; almost US$25bn of assets generated an underlying loss. Yet that conclusion is too hasty. BHP will spend US$4bn punching wells this year, 80% of those in oil rich areas of the Permian Basin and the Eagle Ford shale, where returns on capital can reach upto 100% in the best locations. BHP may have bought Petrohawk for gas but it will make its fortune out of oil. We expect profits from the division to grow steeply over time with production from petroleum growing at 10% a year for the next decade.
Although production volumes rose in almost all commodity groups, this was more than offset by lower prices. Volume growth generated US$435m in additional earnings before interest and tax (EBIT) but falling prices stripped US$5.4bn from the EBIT line. Only base metals generated higher EBIT, a result of stable prices and exceptional copper output.
Average iron ore prices fell by 28% during the half year, wiping US$3.5bn from EBIT. Although they have rebounded since, the company confirmed that new, low cost supply will enter the market in the years to come. As prophesised in Iron ore: this time it’s (not) different on 15 Nov 10, the great iron ore boom will end. BHP will conclude its enormous investment in the sector in anticipation of lower prices.
Legacy
That hasn’t happened yet, however. The company generated just US$6bn in operating cashflow during the period but it spent twice that sum completing expansion projects, mostly in iron ore, copper and oil. Aggressive production growth will be the lasting legacy of outgoing chief executive Marius Kloppers.
New chief executive Andrew Mackenzie, steeped in Rio Tinto and BP conservatism, has signalled a more sedate approach. As in the rest of the industry, capital expenditures will fall and we expect free cashflows will start to rise from next year.
The big unknown is what happens in petroleum. That business will devour cash in the years to come; if rates of return approach our expectations, the company will do fine. If not, BHP might have a ‘Rio moment’ of its own. We’ve upgraded our recommendation guide slightly to account for falling expenditures. BHP’s share price is up 18% since Iron ore: Trumpets and warning bells on 13 Sep 12. For now, HOLD.