The BHP Group Ltd (ASX: BHP) share price is under significant pressure on Wednesday following the release of its full year results.
In early trade, the mining giant's shares are down 7% to $47.80.
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What happened in FY 2021?
For the 12 months ended 30 June, strong iron ore prices underpinned a 69% increase in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to US$37,379 million. This was in line with the market's expectations.
BHP's strong operating earnings growth ultimately led to record free cash flow of US$19.4 billion. This allowed the BHP board to increase its dividend by 151% to US$3.01 per share. This comprises a record final dividend of US$2.00 per share and an interim dividend of US$1.01 per share. The former was ahead of the analyst consensus dividend estimate for the second half.
In addition to its earnings and dividend, the company revealed that it would be merging its oil and gas operations with Woodside Petroleum Limited (ASX: WPL). The deal will see BHP's oil and gas business merge with Woodside. After which, Woodside will issue new shares that will be distributed to BHP shareholders.
Given that its earnings were in line and its dividend was ahead of the market's expectations, investors may be wondering why the BHP share price is tumbling lower today.
Why is the BHP share price tumbling lower?
Today's weakness in the BHP share price appears to have been driven by a mixed reaction to its results and merger plans.
This morning, analysts at Morgans have retained their hold rating and lifted their price target slightly to $45.90. This compares to the current BHP share price of $47.80.
Morgans notes that the Woodside merger removes growth opportunities for BHP. Though, it acknowledges that its balance sheet strength gives it mergers and acquisitions (M&A) optionality.
It said: "BHP has agreed to merge its Petroleum business with Woodside (WPL), with the two sides agreeing to the merged entity being a 52/48 WPL/BHP Petroleum split. Ultimately this is a call on where ESG pressures are headed, with BHP siding with the view that it was better off jettisoning its oil & gas assets near-valuation in order to boost its ESG profile and preserve its long-term cost of capital."
Based on both the BHP share price and Woodside share price at the time of announcement, Morgans estimates that the deal values BHP Petroleum at US$13.8 billion. This is a 5% discount to its US$14.5 billion valuation.
"The downside of divesting petroleum is the loss of high-margin oil & gas earnings and growth projects that represent 2/3 of BHP's total growth profile. Management attempted to answer analyst questions on the concentration of BHP earnings and material reduction in its growth profile, by pointing to its intent to push its existing assets harder ("innovation"), participate in more exploration, early-stage asset entry and yes…M&A," the broker added.
Despite today's weakness, the BHP share price is still up a sizeable 22% over the last 12 months.
