Shareholders of BHP Billiton Limited (ASX: BHP) endured a torturous run in the final months of 2014 as they watched their shares crumble more than 33% from a three-year high to a fresh six-year low.
However, since dipping as low as $26.50 just over a fortnight ago, investors have noticed a steady improvement. The stock has recovered almost 15%, heavily outperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in that time, driven by a solid quarterly production report and a sudden recovery in the oil price.
For those considering investing in the 'Big Australian' in 2015, here are some things you need to consider first.
Commodities Crisis
Thanks to its high level of diversification, BHP Billiton hasn't been hit as hard by the commodities crisis as single-commodity miners, including pure iron ore play Fortescue Metals Group Limited (ASX: FMG). But it is still important to note that each of BHP Billiton's "pillar" commodities are trading at, or near, multi-year lows.
The price of iron ore, for instance, has crashed 53% since January 2014 to be trading at just US$62.45 a tonne. Coal and copper continue to bite the dust while the oil price remains down 52% since June, despite an 11% recovery since Friday.
Cash Flow Pressure
As the world's biggest miner, BHP Billiton also maintains low cost operations which will help it navigate this low price environment better than other, smaller miners. Although it will still remain profitable at these depressed prices, its margins and cash flows will certainly come under pressure.
Notably, the company did announce that it would reduce the number of oil rigs it operates in the US, whilst also cutting its exploration budget by 20% in response to the oil crisis. This should provide some relief to its cash flows.
Progressive Dividend Policy
In this low interest rate environment, BHP Billiton's solid, fully franked dividend yield has become increasingly attractive. What's more, the company has initiated a (voluntary) "progressive dividend policy" which is supposed to ensure that it increases its cash dividend in US dollar terms when it reports earnings each half.
As it stands, the miner is tipped to yield roughly 5.2% fully franked, or 7.4% grossed up. However, the miner may be forced to abandon that initiative if its cash flow comes under too much pressure or if it decides a higher dividend is not in the best interests of shareholders in the long term. While such a decision seems unlikely at this point, it's certainly a risk to keep in mind moving forward.
Bleak Outlook
Unfortunately, things could get worse for BHP Billiton before they get better. While the miner has risen strongly over the last two weeks – largely thanks to a rising oil price – many analysts believe oil and iron ore could fall further in price as the year goes on.
Based on analysts' bearish forecasts for iron ore and oil, now mightn't be the best time to buy BHP Billiton, but there's another excellent way to profit from the resources industry.
