Australia's three biggest resources companies, namely BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL), are investors' go-to resources stocks in the S&P/ASX 200 (ASX: XJO) (^AXJO).
With key infrastructure, huge balance sheets, enormous production targets and scale, they can keep costs low – thus minimising the effect of commodity price falls – and maximising profits for shareholders.
Despite this, in the past five years all three companies' share prices have underperformed the index substantially. However the huge underperformance has prompted some analysts to believe the next few years will be dominated by resources stocks of all shapes and sizes. Here's what you can expect from these three giants in coming years.
Rio Tinto
Rio recently reached a rate of 290 million tonnes of iron ore production per annum from its Pilbara operations. Iron ore accounted for over 90% of Rio's underlying earnings in FY13. With the recent falls in the iron ore spot price its shares have come under intense pressure and are down nearly 11% in 2014 already.
With a shaky history of write-offs and other struggling business units such as energy and aluminium, I'm steering clear of Rio shares. At least until the effects of lower iron ore spot prices can be considered.
BHP Billiton
BHP is also an iron ore producer but remains a much more diversified miner than its peers such as Rio, Fortescue Metals Group Limited (ASX: FMG) and Brazilian iron ore giant Vale SA (NYSE: VALE). With its four pillars strategy, BHP is seeking to grow its output of major commodities such as copper, coal, iron ore and petroleum.
With the ability to offset falls in iron ore with both increasing production and investments in other commodities, analysts are tipping BHP's earnings to grow modestly in coming years. As such BHP could be considered a good long-term buy and hold at current prices.
Woodside Petroleum
Following its recent decision to withdraw from a stake in the giant Leviathan gas field near Israel, Woodside's management will be looking for new ways to grow production and earnings in the long-term. Since the company anticipated it would be required to spend a large amount of capex on the project in coming years, the mountain of cash will likely be spent on exploration activities, particularly in areas such as the Porcupine Basin, East Africa and Myanmar.
Although I like CEO Peter Coleman's honest and conservative management approach, even he has recognised that Woodside needs, "to be a better explorer" because acquisitions rarely add value. Until we get a clearer picture on the Browse FLNG project's timeline or management's new direction for the company, I believe Woodside trades around fair value.
3 better resources stocks
Although investors could find long-term value in BHP Billiton shares I believe both Woodside and Rio Tinto are not standout 'buys' at current prices. Although a poor 2013 result enables Woodside to have the potential to surprise the market in 2014. However with thousands of resources companies listed on the ASX we have more than these three to choose from! (See below)
