18 months ago things were looking pretty grim for BHP Billiton Limited (ASX: BHP). The West Australian mining boom had come to an end and global prices for commodities were collapsing. At one point in January 2016 the BHP shares hit an all-time low of $14.15 – about a third of what they were valued at the height of the mining boom in 2011. And BHP wasn’t alone – the other big miners were feeling the pain too. At the beginning of 2016, the share prices of both Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX:…
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18 months ago things were looking pretty grim for BHP Billiton Limited (ASX: BHP). The West Australian mining boom had come to an end and global prices for commodities were collapsing.
At one point in January 2016 the BHP shares hit an all-time low of $14.15 – about a third of what they were valued at the height of the mining boom in 2011.
And BHP wasn’t alone – the other big miners were feeling the pain too. At the beginning of 2016, the share prices of both Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) were also touching multi-year lows.
But since then it’s been a far rosier story. BHP shares have more than doubled in value and seem destined to cross the $35 threshold for the first time in years. Here are two reasons why investors are getting excited about BHP again.
Production is up
In its FY18 Operational Review, which was released to the market on Wednesday, BHP announced that it had met or exceeded its full year production guidance for key commodities including petroleum, copper, iron ore and coal.
The iron ore result is particularly significant. BHP had downgraded its production guidance for iron ore back in April. But a massive 10% increase in production over the last quarter of this fiscal year has meant that BHP was able to achieve its original production target of 275 million tonnes, exceeding most analysts’ expectations.
Coupled with these strong production figures were double-digit percentage increases in most commodity prices. Year on year prices for oil were up 26%, copper prices increased 23%, LNG was up 18% and thermal coal was up 16%. In terms of prices iron ore was the one blip, with prices down 3%, but this was more than offset by the strong production figures.
It might finally sell its US shale assets
Recent reports – confirmed in the company’s Operational Review – suggest BHP is finally on the brink of selling its unwanted US shale oil and gas assets. Currently the most likely buyer is the British oil company BP, which recently made an offer of well over US$ 10 billion for the portfolio of assets.
There are other options still on the table though: it has been reported that Royal Dutch Shell and Chevron have also lodged bids for the assets, and there is even the outside chance that BHP could spin off its shale assets and form a new child company.
This is what it decided to do with its South African coal operations back in 2015 when it created South32 Ltd (ASX: S32).
The shale oil and gas portfolio has long been a thorn in BHP’s side. The company reportedly bought the assets for US$50 billion back in 2011 when oil and gas prices were booming.
Embarrassingly for BHP neither commodity has performed as well since, and the value of the assets has declined consistently over the last few years. But now global energy prices are showing signs of a recovery, to the point where there is actually some renewed interest in the assets from buyers. Management at BHP seems to have decided that now is finally the perfect time to offload them.
This could be great news for shareholders. Not only could BHP free itself of the burden of these underperforming assets, but shareholders could stand to benefit through a special dividend or share buyback.
It has been reported in the Australian Financial Review that BHP CFO Peter Beaven would prefer the cash from the deal be passed back to shareholders without it “even touching the sides” – meaning the entirety of the proceeds will flow straight into investors’ pockets.
After a terrible FY17, things are looking much better for BHP this year, and it seems like the mining giant is finally starting to deliver real value to investors again.
Global commodity prices can easily change – and this represents a real and constant risk to the entire mining sector – but BHP’s strong production figures should still encourage its shareholders. Plus, the long-awaited sale of its underperforming portfolio of US shale assets is another added reason to feel bullish about BHP.
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Motley Fool contributor Rhys Brock has no position in any of the 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 Scott Phillips.