What’s the outlook for the BHP share price in May?

With a question mark hanging over commodity prices, does BHP have a positive outlook for the month?

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Key points

  • BHP shares have fallen more than 9% over the past month
  • Commodity prices remain elevated but face uncertainty in the near future
  • Some brokers are positive on the company, although UBS thinks prices could fall

The BHP Group Ltd (ASX: BHP) share price has kicked off May 2022 in the red. What is the outlook for the company for the rest of the month and beyond?

Without a crystal ball, it’s impossible to know what a company’s share price is going to do on any day, week, month or even year.

Over the last month, BHP shares have fallen more than 9%, and since the beginning of May, have drifted lower by more than 1%.

What do analysts think of the BHP share price?

One of the latest ratings comes from UBS. It is ‘neutral’ on BHP with a price target of $43. That implies a potential decline of another 9%.

UBS notes BHP’s reduction in production and the prospect of elevated costs. While commodity prices have been strong recently, the broker is expecting prices to fall.

However, some brokers remain positive about the business. For example, Morgans rates the business as a buy, with a price target of $54.30. It thinks that strong prices for BHP’s resources are a stronger positive than the headwinds that BHP is facing.

Citi also rates BHP as a buy, with a price target of $56. The broker is attracted to BHP’s high level of profit and cash flow thanks to elevated commodity prices.

What happened in the latest quarter?

BHP reported a drop in production by its key iron ore division.

The three months to 31 March 2022 showed a 10% decline in production to 59.7mt, compared to the same period to 31 December 2021. BHP blamed the lower volume at its Western Australian iron ore operations on temporary labour constraints due to COVID-19, train driver shortages and planned maintenance activities.

Copper production volume was 1% up quarter on quarter, but down 10% in the year-to-date.

Nickel production volume was down 13% both quarter-on-quarter and year-on-year.

Production guidance for FY22 remained unchanged for iron ore, metallurgical coal and energy coal.

However, full-year total copper production guidance has been lowered to between 1,570kt to 1,620kt, reflecting lowered production guidance for Escondida.

The full-year nickel production guidance has been lowered to between 80kt to 85kt due to COVID-19 related labour constraints.

What next for the BHP share price?

Commodity prices are almost impossible to predict.

BHP has just divested its interest in BHP Mitsui Coal to Stanmore Resources Ltd (ASX: SMR). Stanmore paid a US$1.1 billion cash consideration at completion, plus a preliminary completion adjustment of approximately US$200 million for working capital.

US$100 million cash remains payable to BHP in six months with the potential for an additional amount of up to US$150 million in a price-linked earnout payable to BHP in the 2024 calendar year.

Completion of the proposed merger of BHP’s oil and gas portfolio to Woodside Petroleum Limited (ASX: WPL) is targeted for 1 June 2022.

BHP valuation

BHP is valued at under 8x FY22’s estimated earnings, using UBS numbers.

Morgans thinks that BHP is valued at around 9x FY22’s estimated earnings.

On Citi’s numbers, the BHP share price is valued at 7x FY22’s estimated earnings.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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