Shares in resources giant BHP Group Ltd (ASX: BHP) surged 1.5% at the open on Wednesday, after finishing up 4% in yesterday's session. The BHP share price is $38.28 at the time of writing.
Investors responded positively to BHP and Woodside Petroleum Limited's (ASX: WPL) announcement yesterday. The pair is set to merge their respective oil and gas portfolios and create a global energy company.
BHP also advised yesterday it had approved a capital allocation of US$1.5 billion to develop phase 1 of its Scarborough project in Western Australia.
These top brokers have a buy rating on BHP shares. And each has recently updated the market on its outlook for BHP investors. Let's take a closer look.
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What's the verdict on the BHP share price?
Following BHP and Woodside's announcement yesterday, the team at RBC Capital Markets has weighed in on the debate. The transaction is still considered a taxable item in the eyes of the Australian Taxation Office (ATO). RBC notes this could be a risk to cash flows.
However, it highlights BHP investors might benefit from the deal, given the dividend schedule and exchange ratio of Woodside shares.
RBC says that "the new WPL shares will be distributed to BHP shareholders as an in-specie fully franked dividend," meaning that BHP shareholders won't realise the tax impact.
It also states the "cost base of the issued WPL shares will also be higher relative to a pro-rata split (unlike South32 which received demerger relief)".
RBC also takes note of "BHP's orderly (and lengthy) exit from coal" in a previous note to clients, pointing to the sale of its BMC stake. The broker reckons that BHP is likely to share the profits of this deal with shareholders via a special dividend.
RBC also reckons that BHP will likely hold onto its own BMA metallurgical coal business and push towards high-quality steelmaking coal. These factors combined help build RBC's buy case for BHP. It has an outperform rating and $42/share price target on the company.
Fellow broker Macquarie has also weighed into the investment debate. It too reckons BHP shareholders might benefit from a special dividend this year.
Macquarie thinks the miner could end FY22 in a net cash position of $3.2 billion. That's since offloading its petroleum business and selling its BMC stake. This "indicates ample additional cash return capacity" even when factoring in an 80% payout ratio for FY22.
Regarding BHP's sale of its BMC stake to Stanmore, Macquarie likes the deal structure as it won't see BHP hand over operations until 2022. This "is a positive for BHP given the current buoyant coal prices," as economic ownership won't be backdated, unlike other divestments BHP has completed recently.
The broker also has an outperform rating on the BHP share price and values BHP at $52/share. This implies an over 36% upside potential at the time of writing.
What's the sentiment?
Out of the 14 analysts covering BHP, 9 have a buy rating on the share. The average price target from the group is $43.98. This consensus figure implies an upside potential of around 15.5% at the time of writing.
The team at Argus is the most optimistic, with an $85.75/share price target. Whereas other brokers have a $39 valuation on BHP shares.
The spread in the top and bottom price targets from analysts covering the share is wide at $54 or 180%. No brokers have a sell rating on BHP at this stage.
BHP share price snapshot
In the past 12 months, the BHP share price has slipped into the red, after losing over 10% this year to date.
It has levelled off in the last month, and is up around 1% in that time. Regardless, BHP shares are lagging the S&P/ASX 200 Index (ASX: XJO) return of around 13% in the last year of trading.
