Is the BHP Group Ltd (ASX: BHP) share price a buy?
The BHP share price has risen over 3% today after news broke that Saudi Arabia’s oil facilities had been attacked by drones, knocking out some of the production – perhaps up to 5% of the world’s capacity.
We are not yet sure of how much damage has been done to the facilities and how long it will take to fix. Nevertheless, it led to oil prices jumping by around 10% today. The US blames Iran for the attack, although Yemen rebels are claiming the glory for the assault.
BHP could also be a significant beneficiary from this news because it is a large oil producer. In FY19 it produced 121 million barrels of oil equivalent, so you can see how an extra US$10 a barrel could be a large boost to earnings.
Resource businesses get so much upside when prices are a bit higher. There are largely the same costs in producing resources whether the commodity price is high or low, so the additional revenue normally gets added straight to the bottom line. That’s why resource profit can be so cyclical.
We may see the oil price rise even higher as we learn more about what’s happened in Saudi Arabia. This attack may give the aggressors, whoever did it, the motivation to carry out other attacks on Saudi Arabian oil targets.
BHP’s petroleum division is not the biggest earning division – that belongs to the iron segment, so BHP is not the best way to play these developments. However, the diversified operations shows that it can benefit from various global problems (eg the Vale iron ore disaster and now this).
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Motley Fool contributor Tristan Harrison 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.
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