The earnings numbers themselves will not be particularly inspiring to investors, with underlying EBTIDA coming in at $5.995 billion (a 54% decline on the previous corresponding period). Importantly, this is in line with the markets expectations. Underlying net profit collapsed by 92% to $412 million and while this number is getting the lion’s share of the headlines, I would focus more on the EBITDA number. Revenue declined 37% to $15.7 billion, which is under the market consensus, with soft numbers in its copper division, while iron ore and petroleum seem OK.
The key focal point has been the widely expected move away from its progressive dividend. Just as RIO are targeting a 40-60% payout ratio, BHP are looking at a minimum payout of 50% of underlying earnings. This is obviously cash flow positive and provides them good flexibility going forward. They have also lowered CAPEX to $7 billion this year and $5 billion in 2017, and changed to a more simplistic operational model, with many focusing on key management changes. All eyes now fall on ratings agency S&P and what they make of the moves to shore up its balance sheet, as we know they have BHP on review. One suspects BHP have probably done enough here and this is a positive for both BHP’s debt and therefore the equity too.
Commentary has been mixed from the CEO Andrew Mackenzie. On one hand Mr Mackenzie has said that he is ‘sanguine’ about iron ore long-term prospects, while the commodity outlook is significantly worse than six months ago. However, he has balanced that by saying he sees ‘strong upside in oil and copper’. The market will take no real heart from these comments, as we know CEO forecasting has been poor over the last 12 months or so. It must be said that Mr Mackenzie is not the only CEO bullish on the longer-term prospects for oil.
All-in-all, BHP have looked to defend their credit rating. The earnings numbers are soft, but shouldn’t see significant re-rating from analysts. The catalyst for the share price has to be the macro and specifically oil. Take a view on oil and BHP should follow suit.