How BHP Billiton Limited plans to profit from low oil price


All eyes are back on resource giant BHP Billiton Limited (ASX: BHP) with its shares rallying around 15% in the past month.

It’s a huge move in such a short space of time and has raised plenty of questions as to whether the gains can be maintained, whether they will be quickly reversed, or whether this could be a true move off the bottom with further gains ahead…

While the near term share price move is anyone’s guess, there is a reason to be positive about the longer term outlook for BHP shares.

Seizing the opportunity

It would appear pretty obvious that the resource cycle is now somewhere near the bottom. While buying into BHP a few years ago was (in hindsight) terrible timing as it coincided with the peak of the resource cycle, the risk-reward trade-off has now dramatically reversed.

Just as a cyclical low signals an opportunity for investors to go hunting for value, equally shareholders want to see management taking a pro-active, counter-cyclical view to allocating capital.

BHP appears to be positioning itself to do just that with management recently updating the market as to plans for its Petroleum division.

According to the recently released Operational Review for the nine months ending March 31, the Petroleum division is set to spend US$640 million on an exploration program for the 2016 financial year to fund additional access and testing of future growth opportunities.

This exploration program is focussed in the deep-water Gulf of Mexico, the Caribbean and the Beagle sub-basin off the coast of Western Australia.

The increased focus on spending within the Petroleum division would appear to be an acknowledgement by BHP that current low oil prices make for an ideal time to invest in the sector and position the company to benefit from an eventual rebound in the oil price.

The increased spending would also suggest that the economics of exploration have vastly improved with the costs of operating drilling rigs presumably reducing substantially.

While the current focus would appear to be on BHP ramping up its own organic exploration, given the price of oil and gas assets at present this could easily spill over into merger and acquisition activity.

Investors have already witnessed an approach by Woodside Petroleum Limited (ASX: WPL) for Oil Search Limited (ASX: OSH), however there could be plenty more manoeuvres within the sector.

In fact, a reasonable argument could be made that currently the trade-off between “build” versus “buy” would favour the later.

Which Blue Chip Share will YOU Buy Next?

Is BHP still blue chip? Discover The Motley Fool's top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.