BHP Billiton Limited and Woodside Petroleum Limited: 2 of my favourite resources stocks

These 2 resources plays seem to be well worth buying: BHP Billiton Limited (ASX:BHP) and Woodside Petroleum Limited (ASX:WPL)

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For investors in BHP Billiton Limited (ASX: BHP) and Woodside Petroleum Limited (ASX: WPL), life at the present time is rather tough. That's because, with the prices of commodities falling dramatically in recent months, their top and bottom lines are coming under severe pressure. As such, investor sentiment has weakened considerably and the two companies have seen their share prices slump by 32% (BHP) and 16% (Woodside) in the last year.

Looking ahead, such share price falls are perhaps justified, with BHP set to report a decline in its earnings of 35% per annum during the next two years. Woodside, meanwhile, is not far behind and is expected to post a fall in its net profit of 25% per annum during the same time period. And, looking beyond that, it would be of little surprise if things get worse before they get better, with commodity prices showing little sign of green shoots of recovery.

However, it is the two companies' responses to their current predicaments that is really impressive. In the case of BHP, it is using this time to restructure its business, with it having spun-off a number of non-core assets via the South32 business. This should allow BHP and South32 to add shareholder value through the delivery of greater efficiencies, and should also make BHP a more streamlined and focused entity.

Furthermore, BHP has sought to reduce its costs so as to limit the pressure on margins and has increased production. This may have caused an even greater glut of supply in the short run, but puts additional pressure on its smaller rivals and may end up strengthening BHP's position relative to its peers in the long run.

Similarly, Woodside has adopted a sound strategy of using its key strength, vast financial firepower, to make acquisitions such as the assets of Apache. As with BHP, this could increase its market share and place it in a stronger position relative to its rivals. And, with Woodside having opted for contracted pricing for the output of its major liquefied natural gas (LNG) project, Pluto, it could still outperform its oil and gas industry rivals over the medium term as it benefits from having reduced debt levels and a stronger balance sheet.

While both companies are set to disappoint in the next couple of years with regard to their earnings figures, their yields remain appealing. For example, BHP is expected to yield 6.3% in 2016, while Woodside has a forward yield of 4.5%. Both of these compare favourably to the ASX's yield of 4.4% and show that, while the two companies may take time to return to profit growth, investors should receive an impressive income return in the meantime.

Of course, further commodity price falls are likely to hurt the share prices of BHP and Woodside. However, their reaction to such problems and their ability to use their strengths in order to adapt should stand them in good stead. As such, they remain compelling long-term investments.

Motley Fool contributor Peter Stephens owns shares in BHP Billiton and South32. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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