Why are BHP shares on a downward slide?

• BHP Group (LON: BHP) shares continue their descend, dropping to 2,123 pence on Thursday (02 September 2021)
• The stock has been declining since the group announced plans to sell its oil and gas business
• Its credit rating could fall to its lowest ever, S&P Global warned
• Keen to trade BHP Group shares? Open an account with us to get started.

BHP Group share price: what’s the latest?

BHP Group shares have fallen 8% in the last three days, as markets eased on the back of lower US consumer confidence readings and month-end re-balancing.

‘A spike in eurozone inflation might also play a part, putting heavy pressure on European stocks as investors start to worry that ECB hawks will begin to call for an earlier end to loose policy and bring forward a post-crisis rate hike,’ said IG’s chief market analyst Chris Beauchamp.

But with the US central bank deferring tapering to later in the year, the overall market atmosphere ‘will remain conducive for risk assets’, he added.

BHP Group to divest petroleum business

BHP shares have been declining since it announced plans to sell its oil and gas business to Woodside Petroleum two weeks ago. The iron ore miner has lost over 10% of its market capitalisation in all since that announcement.

Deutsche Bank analysts believed the divestment to be a ‘good strategic step’ as it ‘increases the likelihood of copper and nickel acquisitions’.

In the same vein, they ‘see limited valuation uplift’ from the proposed structure as ‘it leaves BHP short on growth options’.

Similarly, S&P Global cautioned that the sale could threaten BHP’s credit rating, as it would increase the group’s exposure to iron ore price fluctuations even more.

As a result of a potentially ‘less diversified portfolio’, the rating agency could lower ratings on BHP ‘by up to two notches in the coming months… if the divestment of its petroleum assets takes place as proposed’.

This means BHP’s credit rating could drop to BBB+, its lowest ever.

Moody’s, meanwhile, sees ‘no material credit implications’, but acknowledges that the potential exit ‘will reduce scale and commodity diversity’.

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How do analysts view the stock?

In other news, the iron ore giant is also planning to unify its dual-listing company (DLC) structure. As part of this restructure, BHP will shift its primary listing to the Australian Stock Exchange, while retaining a smaller, standard listing in London.

RBC Capital analyst Tyler Broda reiterated an ‘outperform’ rating on BHP Group, a day after the announcement.

Barclays, which rated the stock ‘overweight’ with a price target of 2,500p, acknowledged that while ‘there are risks’ associated with the move, ‘an off-market buyback in Australia in February would address this: we forecast a US$9bn buyback in FY22 to meet an assumed US$7.5bn net debt target’.

As part of the DLC restructuring, BHP Group’s UK PLC shares will be exchanged for its Australia Ltd shares on a one-for-one basis.

‘Given PLC shares pre-announcement traded at a 16% discount to Ltd, this has had a materially positive share price benefit to the PLC. We expect the spread to move to about a 6% discount with further closure likely as we move towards votes by PLC and Ltd holders in Q1-22,’ the analysts wrote.

Read more: Top 5 FTSE 100 stocks to watch in September 2021