BHP Billiton Limited's (ASX: BHP) dividend is forecast to increase from $0.39 per share in financial year 2016 to $0.70 per share in financial year 2018. That's an increase of 80% in two financial years. A key reason for this dividend growth outlook is improved sentiment in the iron ore and oil industries. Their prices have risen by 33% and 39% respectively in 2016. However, uncertainty lies ahead for both commodities over the medium term. Therefore, I'm bearish on BHP's income appeal.

Iron ore

The price of iron ore has been boosted by increased demand from China. It has imported a billion tonnes of iron ore over the last year. A main cause of this is a surging Chinese property market. Annual house price growth reached over 9% in August. Alongside government stimulus, Chinese demand for iron ore could continue to rise in the short run.

However, China is also taking action to cool its property market over the medium term. It has restricted property sales in a number of cities and more regions could do likewise. Therefore, China's construction sector may not continue to grow at the same pace as it has done in 2016.

Alongside this is a planned increase in the supply of iron ore. For example, Vale's S11D project is due to come onstream in 2017 and this will add around 90 million tonnes of iron ore capacity each year. Similarly, the Roy Hill mine could add up to 56 million tonnes to global iron ore capacity over the medium term. This mix of higher supply and slowing demand could push the iron ore price downwards.

Oil

BHP's earnings and dividend may also be negatively impacted by a lower oil price. Although the price of oil has been boosted by Opec's recent agreement, the cartel followed this up by increasing production to an all-time high in September. In my view, this does not indicate that a deal to cut production lies ahead in the short run.

However, the market has begun to price in a cut in production of at least 700,000 barrels of oil per day (bopd). Therefore, the oil price could fall if Opec does not finalise the deal to cut production at its next meeting. Alongside this risk is sluggish demand for oil which the International Energy Agency (IEA) says is much worse than had been anticipated earlier in the year.

Outlook

BHP's new dividend policy to pay out at least 50% of underlying attributable profit each year provides transparency to income investors. It also means that BHP has sufficient capital after the payment of dividends to reinvest in its asset base for future growth or to sustain its operations.  However, its yield is lower than popular income stocks such as Telstra Corporation Ltd (ASX: TLS) and Westpac Banking Corp (ASX: WBC). They yield 6.2% and 6.3% respectively, versus 1.7% for BHP.

Further, BHP offers a lack of certainty in its future dividend payments due to its status as a price taker. It remains dependent upon the price of commodities such as iron ore and oil. Their outlooks are uncertain given the potential for a worsening of their supply/demand imbalances. Therefore, in my opinion BHP lacks appeal as an income stock.

The post Why I think you should avoid BHP Billiton Limited shares appeared first on The Motley Fool Australia.

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Last week, the price of Brent crude oil reached a 2016 high of almost US$54 per barrel. It has been pushed upwards by improved investor sentiment following Opec's deal to cut oil output to between 32.5 million and 33 million barrels of oil per day (bopd). The oil price was also supported late last week by a decline in petrol stocks of 1.2 million barrels and a drop in distillates in storage of 3.7 million barrels.

A higher oil price is good news for oil and gas companies Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH). However, I believe that the oil price faces an uncertain future. That's why I'm bearish on Santos's outlook.

Oil price fall

Assumptions that the supply and demand of oil are back in balance were put into doubt by the Energy Information Administration (EIA). It reported a rise in raw crude reserves of 4.9 million barrels last week. This follows the International Energy Agency's (IEA) statement that a glut of supply will continue to be a feature of the oil market until at least mid-way through 2017.

Although Opec has agreed to cut production, it is not widely seen as a firm deal to do so. This will only come once it has been decided which countries will cut production and by how much. Opec's all-time high production levels in September mean that it may be harder to persuade its members to reduce supplies. That's especially the case since Nigeria and Libya are ramping up production after short term interruptions and Iran has repeatedly stated its intent to move towards pre-sanction era levels of production.

LNG price

It's a similar story for LNG prices. Global LNG capacity is forecast to rise by 50% to 370 million tonnes a year between now and 2020. This could fully offset the planned increase in demand from China and elsewhere. In the short term, there may be an increase in LNG pricing ahead of a key winter period for major importers such as Japan and South Korea. However, seasonality aside, the medium term trend is set to be a downward one in my opinion.

Outlook

Santos has made progress in improving its financial position. For example, in the first half of the 2016 financial year it reduced net debt by US$220 million to US$4.5 billion. Further, Santos has sufficient liquidity through US$1 billion in cash and undrawn facilities of US$2.3 billion. Its decision to postpone dividends is also prudent given its reported underlying net loss of US$5 million in the first half of the 2016 financial year.

However, more losses could be ahead if oil and LNG prices fall. Due to the potential for an exacerbation of the current demand/supply imbalance within those markets, I have a bearish stance on Santos.

The post Why I'm bearish on Santos Ltd's share price outlook appeared first on The Motley Fool Australia.

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The last two days have seen the iron ore price rise by 4%. This takes the gain for the steelmaking ingredient to 33% in 2016. In response, shares of iron ore miners Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) have moved higher. They are up by 15%, 27% and 162% in 2016.

While confidence across the iron ore sector may be high, in my view iron ore faces a challenging future. Alongside heightened political risk and a bearish outlook for aluminium, I feel that now is not the right time to buy Rio Tinto.

Production forecasts

In 2017, the supply of iron ore is forecast to exceed demand by a greater margin than in 2016. That's because the two largest seaborne iron ore suppliers, Australia and Brazil, are expected to increase production. The world's major iron ore producers account for around 80% of the seaborne market. They expect to add upwards of 75 million tonnes next year. This is up from 2016's 55 million tonnes. The effect of this increase in supply could be a lower iron ore price.

Demand fears

Alongside a planned increase in supply, demand for iron ore could fall. There are concerns in China regarding the growth rate of its property market. It is the biggest driver of commodity demand and has increased at an annualised rate of over 9% in the last year. Therefore, action is being taken to restrict property ownership. This could cause a slowdown in the construction industry and reduce demand for iron ore.

Political risk

Rio Tinto faces an increased level of political risk. That's because Western Australia National's leader Brendon Grylls has proposed a mining tax which would increase the so-called production rental fee from $0.25 per tonne to $5 per tonne. Rio Tinto estimates that this would add around $1.5 billion to its annual cost base. It would undo a lot of improvements that Rio Tinto has made to make its business more competitive versus peers. It could also cause a reduction in capital expenditure, which would hurt the company's long term financial outlook.

Aluminium

Rio Tinto's financial prospects are also uncertain due to the bearish outlook for aluminium. The base metal contributed 20% of Rio Tinto's profit in the first half of the 2016 financial year, but its price looks set to fall due to a supply/demand imbalance. Chinese aluminium producers are expected to raise production over the medium term. For example, the world's largest producer of aluminium by output, Hongqiao, plans to expand production to 6 million tonnes by the end of the year.

Outlook

Rio Tinto faces an uncertain future in my opinion. The prices of iron ore and aluminium could fall and hurt the company's financial performance. It also faces heightened political risk from a potentially damaging tax change. Therefore, while investor sentiment towards Rio Tinto has improved and boosted its share price, I feel that now is not the right time to buy it.

The post Should you buy Rio Tinto Limited for iron ore price gains? appeared first on The Motley Fool Australia.

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In the last five years CSL Limited's (ASX: CSL) share price has risen by 242%. This is ahead of the performance of the S&P/ASX 200 (Index: ^AJXO) (ASX:XJO), which is up 30% in the same time period. This may lead investors to question whether it is now too late to buy CSL. However, I believe that it offers further capital gains in the medium to long term.

Consistent returns

CSL's earnings have risen at an annualised rate of 14.1% during the last 10 years. This highlights the consistency and stability which the company offers. Even though the outlook for the global economy is uncertain thanks to a slowing China, Brexit and US interest rate rises, CSL offers a resilient financial future.

CSL enjoys a low cost of production versus rivals. That's because CSL has invested heavily in new manufacturing facilities. It also has superior intellectual property compared to peers thanks to its investment in innovation. For example, it has spent US$2.3 billion on R&D in the last five years. This provides it with a relatively wide economic moat which reduces its risk profile.

Growing target market

The market for healthcare services is likely to grow rapidly over the long term. A key reason for this is a forecast increase in world population from 7.3 billion to 9.7 billion between today and 2050. Alongside this is an expected increase in wealth across emerging markets.

For example, in China and India GDP per capita is forecast to rise by 38% and 22% respectively over the next four years. This combination of higher demand and greater affordability of healthcare should increase the size of CSL's potential customer base.

An improving business

CSL's purchase of Novartis' influenza vaccine business could boost the company's earnings in the medium term. It is forecast to break even in 2018 and in my view it has a bright future due to CSL's track record of process improvements. Continued optimisation of the division is forecast to drive Seqirus' sales to US$1 billion by 2020.

Further, CSL has made progress in recent years on expanding the indications of its products and also on improved formulations of immunoglobulin-based therapies. Its expansion into emerging markets improves its geographic spread, which reduces its risk profile and increases its growth potential.

Valuation

CSL is expensive when compared to the ASX. It has a P/E ratio of 31.1 versus 17.3 for the index. However, when compared to sector peers Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH), CSL's valuation has appeal. For example, Ramsay has a P/E ratio of 33.9 and Cochlear has a P/E ratio of 39.5.

Given CSL's bullish growth prospects and consistent performance, I feel that its shares will continue to rise. Therefore, in my view it isn't too late to buy CSL.

The post Is it time to buy CSL Limited shares? appeared first on The Motley Fool Australia.

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Life could be about to get tougher for oil stocks Woodside Petroleum Limited (ASX: WPL), BHP Billiton Limited (ASX: BHP) and Santos Ltd (ASX: STO). The outlook for the oil price has become more uncertain this week. The imbalance between demand and supply could worsen over the medium term and push the price of oil downwards. This would hurt Woodside's financial performance and could cause its relatively high valuation to come under pressure. Therefore, in my view it is a stock to avoid.

Sluggish demand

The International Energy Agency (IEA) reiterated its bearish view on oil this week. It stated that the oil market will remain in a state of oversupply until at least halfway through 2017. A key reason for this is sluggish demand for oil. The IEA has reduced its expectations for growth in demand for oil to 1.2 million barrels of oil per day (bopd). This is down from the 1.4 million bopd forecast in August and is also lower than September's forecast for growth of 1.3 million bopd.

The main reasons for the IEA's downbeat outlook are slowing demand from China and reduced demand from the developed world. They have contributed to a fall in demand growth to 0.8 million bopd in the third quarter of 2016. This is the lowest rate of growth for four years. In my view, this shows that the IEA's already bearish forecasts for oil demand growth could fall further.

Rising supply

Despite Opec's recent agreement to cut production, there is still some way to go before a deal is finalised among its members. A decision on who will cut production and by how much is yet to be confirmed. In September, Opec's production increased to a record level of 33.6 million bopd. Further increases in production are likely in the short run as supply issues have meant that Nigeria and Libya's production has been cut. When that production comes back online, Opec's overall production is likely to hit a new record high.

This makes a cut in production to 32.5-33 million bopd increasingly unlikely in my view. Therefore, the recent rally in the oil price could come to an end.

Outlook

A falling oil price would hurt Woodside's financial performance and could cause its valuation to decline. Woodside trades at a premium to the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO). It has a P/E ratio of 26 versus 17 for the index. In my view, such a premium is undeserved given the outlook for the oil industry.

Woodside is likely to survive an oil price fall thanks to its financial strength. For example, Woodside had a gearing ratio of 31% and free cash flow of US$176 million in the first half of financial year 2016. However, in my view its shares should be avoided due to its status as a price taker and the uncertainty of the future oil price.

The post Why it might be time to sell your Woodside Petroleum Limited shares appeared first on The Motley Fool Australia.

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Investing in hearing device company Cochlear Limited (ASX: COH) for its dividend may seem counterintuitive. That's due to it having a yield of 1.8% versus 4.2% for the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO). However, in my view Cochlear offers a consistent financial outlook and scope to increase dividends over the medium term. Therefore, I feel it has appeal for income-seeking investors.

Financial stability

Cochlear's risk profile is relatively low. This means that its dividend payments should be robust and consistent in comparison to ASX peers. For example, Cochlear has a diverse geographical spread. It generates 43% of its sales from the Americas, 40% from Europe, the Middle East and Africa and the remaining 17% from Asia Pacific. Therefore, should one region endure a challenging period, the other regions can offset this.

The hearing device market has high barriers to entry. This enables Cochlear and its peers to experience relatively low competition. Further, Cochlear has a strong reputation among customers for quality and innovation. This increases customer loyalty which provides more stable and resilient financial performance. Cochlear's customer loyalty was enhanced by the recall of the Nucleus 5 implant in 2011. Although it caused Cochlear's shares to fall in the short run, it showed that the company put customers first.

Cochlear invested $143 million in product innovation in the 2016 financial year. This was an increase of 12% on the prior year. This helps to strengthen its competitive position versus peers and means that its dividend is increasingly robust.

Dividend growth

As well as a resilient dividend, Cochlear's income prospects are enhanced by its earnings growth potential. It is estimated that 600 million people worldwide are affected by hearing loss. However, only 500,000 of them have received a hearing implant. A key reason for this is a lack of affordability in the developing world. This provides growth potential for Cochlear as wealth across the emerging world continues to grow.

Further, Cochlear has improved the efficiency of its global supply network in order to access more customers. It has moved to ownership of the majority of its global distribution network which provides it with greater marketing control. This should enhance customer loyalty and improve Cochlear's earnings growth outlook through a more direct engagement with potential customers.

Cochlear also has scope to leverage its direct-to-patient communications through Cochlear Link. This allows it to cross-sell products and services to existing customers. The potential for upgrades to existing products remains high. For example, the majority of implant recipients are yet to upgrade to the Nucleus 6 sound processor. This should provide a consistent and high rate of earnings growth over the long run.

Outlook

In the next two financial years, Cochlear's dividend payments are forecast to rise at an annualised rate of 16.5%. This puts it on a forward yield using financial year 2018's forecast dividend payments of 2.3%. This is behind the yields on popular income stocks such as Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA) and Insurance Australia Group Ltd (ASX: IAG). They yield 5.6%, 4.3% and 4.8% respectively. However, in the long run I believe that Cochlear could become an appealing dividend stock due to its mix of dividend stability and dividend growth prospects.

The post 2 reasons why Cochlear Limited has dividend appeal appeared first on The Motley Fool Australia.

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The RBA is forecast to cut interest rates by 50 basis points in the next year. This would reduce interest rates to 1% and mean that the return on cash balances will be even lower than it is today. Therefore, dividend-paying shares could become increasingly popular among investors. Although Ramsay Health Care Limited (ASX: RHC) yields 1.6% versus 4.2% for the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO), I believe that it has a bright future as an income stock.

Dividend affordability

Ramsay's current dividend is highly affordable. In financial year 2016 it paid out 54% of earnings as a dividend. Further, free cash flow covered dividend payments 1.7 times. This shows that Ramsay is able to invest in its future growth through high levels of capital expenditure while also increasing dividends.

The stability and consistency of Ramsay's earnings mean that it could afford to pay a higher proportion of profit as a dividend without increasing its risk profile. The private hospital sector enjoys a high level of earnings visibility. It also has high barriers to entry and an oligopolistic market structure. This reduces the level of competition among incumbents and makes a higher dividend payout ratio more sustainable in the long run.

Dividend increases

Ramsay's dividends are set to be positively catalysed by its rising earnings. The healthcare sector is forecast to benefit from increased demand from an ageing population. Over the next 50 years, the number of people in Australia aged 65 or over is expected to increase from 3.4 million to 9.6 million. It's a similar story in other developed nations such as the UK and France, where Ramsay also has operations. This should provide Ramsay with consistently growing demand for its services which could boost dividends.

A brownfield investment programme means that Ramsay's size and scale will increase over the medium term. In the 2016 financial year Ramsay completed over $300 million in brownfield capacity expansions. This should allow Ramsay to strengthen its competitive position within the Australian private hospital market. Its leverage with private insurance companies should improve as a result over the medium term.

Ramsay has also announced plans to establish a network of pharmacies. This provides a new growth space for the company. It should benefit from cross-selling opportunities among existing patients. Due to its sound financial standing, Ramsay should still be able to afford to engage in M&A activity. A weaker Euro and Sterling provide additional opportunities in Europe for Ramsay to consolidate its dominant position.

Outlook

Ramsay has increased dividends per share at an annualised rate of 17% in the last decade. Given the affordability of its dividends and its bright earnings growth prospects, a similar rate of growth is achievable in the long run.

Its dividends are forecast to rise by 15.1% per annum during the next two years. This puts it on a forward yield of 2%. This is lower than the yields of popular income shares such as Telstra Corporation Ltd (ASX: TLS) and Westpac Banking Corp (WBC). They yield 6.2% and 6.1% respectively. However, in my view Ramsay has the potential to become an appealing income stock in the long run due to its dividend coverage and earnings growth potential.

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Gold prices edged lower yesterday due to a strengthening US dollar. The dollar index, which measures the greenback against a basket of six major currencies, increased by 0.3%. This was bad news for gold miner Newcrest Mining Limited (ASX: NCM). It came after the gold price fell by 4.6% last week.

Newcrest's shares are down 9% in the last five trading sessions. Could they decline to their 2016 starting price of $13?

Gold update

The outlook for gold has become more uncertain in recent days. There is intense speculation that the Federal Reserve will raise interest rates in December. The chances of this happening have increased due to generally positive economic data from the US. Although the jobless rate increased to 5% last week, the overall performance of the manufacturing and services sectors has been strong.

This has caused traders to price in a 70% chance of a rate hike in December. A stronger dollar is bad news for the gold price because it makes the precious metal more expensive to buy for non-US based investors. A higher interest rate also makes interest-producing assets more appealing versus gold.

Members of the Federal Reserve have hinted that rates could rise before the end of the year. For example, the Chicago Federal Reserve President stated yesterday that he 'could be fine' with raising US interest rates in December. Since Newcrest relies on gold production for 85% of its sales, a fall in the price of gold could hurt its financial performance.

Sector peers

After its 58% rise since the start of the year, Newcrest trades on a relatively high valuation. It has a P/E ratio of 29, which is higher than the P/E ratios of sector peers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). They have P/E ratios of 13 and 17 respectively. Further, Newcrest has less diversity than BHP Billiton. This increases its risk profile relative to its two sector peers and means it is less deserving of the current valuation premium in my view.

Looking ahead

Newcrest's planned acquisition of a stake in SolGold has the potential to positively catalyse its profitability. Newcrest's free cash flow of US$814 million in financial year 2016 also provides the opportunity for further M&A activity, as well as exploration and asset development over the medium term.

However, in my view Newcrest's shares will move in line with the gold price. It could endure further falls over the short term since a US interest rate rise before the end of the year is more likely than not. But I doubt that Newcrest will slump back to its 2016 starting price of $13. It may be overvalued relative to peers, but demand for gold should remain relatively high in the medium term. That's because only one interest rate rise is forecast for the next year. This will lead to a modest fall in Newcrest's share price rather than a crash in my opinion.

The post Could Newcrest Mining Limited shares crash back to $13? appeared first on The Motley Fool Australia.

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Fortescue Metals Group Limited (ASX: FMG) has agreed to buy out BC Iron's 75% interest in the Nullagine iron ore mine. The price is $1 and brings to an end a seven-year partnership. The mine was closed earlier this year because the cost of production exceeded the level at which it was possible to make a profit. However, the deal adds 6 million tonnes to Fortescue's annual iron ore capacity. This could help it to boost production to its target range of 165-170 million tonnes in the 2017 financial year.

Diversification

However, Fortescue's aim to increase iron ore production may prove to be a poor strategy. Although the price of iron ore has risen by as much as 30% in 2016, its outlook is uncertain. The supply of iron ore is forecast to rise by over 17% in the next four years as projects in Australia and Brazil come onstream. For example, Brazil's Vale is due to start a four-year ramp-up in production from its S11D project. This could cause the surplus in iron ore to almost treble to 56 million tonnes per annum.

Alongside this, demand for steel in China may fall. China is attempting to cool its housing market following annualised gains of 9.2% in house prices over the last year. Restrictions on house purchases have become more common across major Chinese cities. This may reduce construction activity and create a large glut in the supply of iron ore.

In my view, Fortescue's lack of diversity is therefore a risk at a time when the iron ore price may fall. Although the purchase of the 75% stake in Nullagine cost $1, I feel that Fortescue needs to invest in non-iron ore areas to reduce its risk profile. For example, mining peers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) offer greater diversity and a lower risk profile than Fortescue.

Looking ahead

Fortescue's P/E ratio of 11.1 is relatively low. For example, the materials sector has a P/E ratio of 12.6, BHP has a P/E ratio of 12.9 and Rio Tinto's P/E ratio is 16.6. However, Fortescue's financial standing increases its risk profile. For example, it has a net debt to equity ratio of 62% even after reducing debt levels by US$2.8 billion in the 2016 financial year. When combined with a lower iron ore price, this meant that interest payments were covered 4.8 times by net operating cash flow in the 2016 financial year.

Given the uncertain outlook for iron ore, Fortescue is a high-risk stock in my opinion. Even if it is able to reach its increased production target in financial year 2017, iron ore prices are expected to average US$45 per tonne in 2016 and 2017 according to Fitch. This would put Fortescue's financial performance under pressure and its share price could decline. Therefore, I feel that these three blue-chips offer superior investment opportunities.

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Healthcare stocks have become increasingly popular in 2016. Over the year Healthscope Ltd (ASX: HSO), Ramsay Health Care Limited (ASX: RHC), and Cochlear Limited (ASX: COH) have outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). The ASX has risen by 3%, while Healthscope is up 14%, Ramsay is 17% higher and Cochlear has gained 47% year-to-date. In my view, Healthscope has the potential to record significantly greater returns for these three reasons.

Ageing population

Healthscope's financial performance is set to be boosted by a demographic tailwind. For example, the proportion of the Australian population aged over the age of 65 is forecast to double to 25% over the next 40 years. Rising life expectancy and a lower birth rate are the main causes of this. A higher number of people aged 65 or over is likely to mean a higher demand for healthcare. That's because chronic conditions and illnesses are usually more prevalent in that age group than in younger age groups.

This provides Healthscope with a growing market for its services. It is well positioned to capitalise on this since it has substantial scale as one of Australia's largest private hospital providers. This should allow it to negotiate successfully with private health insurers on areas such as level of claims and the range of services covered for reimbursement. Further, Healthscope has a number of Tier 1 hospital assets in major cities. This should provide high demand for its services as well as greater bargaining power with private health insurers.

Financial standing

In financial year 2016 Healthscope strengthened its balance sheet. This was done through the refinancing of its existing debt facilities. It increased Healthscope's total debt facilities to $2.2 billion and extended the maturity profile out to 10 years. Its current debt levels indicate that Healthscope's balance sheet could accommodate more debt to fund growth opportunities. For example, it has a net debt to equity ratio of 54%. Further, Healthscope's interest payments were covered 6.7 times by operating profit in the 2016 financial year.

Healthscope's financial strength provides it with the flexibility to invest for growth. For example, it invested $440 million in growth projects in financial year 2016. This included nine major hospital expansion developments. Healthscope has either approved or started constructing projects which are due to deliver 833 beds and 53 theatres by the end of financial year 2019. Its long term pipeline includes the Gold Coast Private and John Fawkner Private. They could positively catalyse Healthscope's long term earnings growth.

Outlook

Healthscope has a P/E ratio of 26.4. This may seem high while the ASX has a P/E ratio of 17.4. However, healthcare peers Ramsay and CSL Limited (ASX: CSL) have P/E ratios of 34.4 and 31.7 respectively, while Cochlear's P/E ratio is 40.5. Therefore, Healthscope's valuation could be viewed as low relative to its sector peers. Alongside its sound finances and the growth potential from an ageing population, Healthscope's valuation indicates that it could rise in value.

The post 3 reasons to buy Healthscope Ltd shares appeared first on The Motley Fool Australia.

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The Opec deal to cut the supply of oil has been received positively by investors. The price of oil has moved to its highest level since June. Brent now trades at US$52.50 per barrel. This has pushed Oil Search Limited's (ASX: OSH) share price up by 15% since the deal was announced on 28 September.

Similarly, Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) have both risen by 11% since that date. However, even though the prospects for oil may be brighter than a couple of weeks ago, I'm still bearish about Oil Search.

An unlikely deal

The Opec deal was a surprise to many investors and had not been priced in. Therefore, in my view the rally in the price of oil since the announcement will prove to be short-lived. Saudi Arabia's decision to cut the prices of some of its oil exports in the aftermath of the deal shows that it may not prove to be a lasting agreement. The details of exactly which Opec members will cut production and by how much still need to be finalised. This provides a degree of doubt as to whether a cut in production will be put in place.

Supply versus demand

Even if Opec finalises a deal to cut production, there will continue to be a glut of supply over the medium term. Opec's production reached record levels in August and a reduction of 700,000 barrels of oil per day (bopd) is unlikely to have a major effect on the oil price. Demand growth is forecast to remain weak over the medium term. The oil market may take until late 2017 to return to equilibrium according to the International Energy Agency (IEA).

LNG

It's a similar story in the LNG market. Oil Search's 29% stake in the Papua New Guinea LNG project may have long term growth potential, but LNG prices could fall over the medium term. The global supply of LNG is expected to rise by 50% over the next four years as 130 million metric tons of LNG come onstream each year between now and 2020. The LNG market is already oversupplied and LNG prices could therefore continue to struggle.

Alongside this is slow growth in demand. Japanese imports of LNG have fallen by 6% in the first seven months of 2016. Likewise, South Korea's demand for LNG has risen by only 3% in the first eight months of 2016. As the two largest importers of LNG in the world, Japan and South Korea's lower-than-expected demand for LNG does not bode well for its price potential in my view.

Outlook

Oil Search has made progress by improving its operational performance. For example, it reduced unit production costs by 8% to US$8.21 per barrel of oil equivalent (boe) in the first half of the 2016 financial year. This helped Oil Search to maintain positive operating cash flows.

Further, it will implement a strategy refresh which could create more cooperation between the PNG LNG and Papua LNG projects. Although this could boost its operational performance, the bearish outlook for LNG and oil prices means that I'm avoiding Oil Search.

The post Why I'm avoiding Oil Search Limited shares appeared first on The Motley Fool Australia.

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Last week was a disappointing week for the gold price. It fell from US$1,316 per ounce to around US$1,258 per ounce, which is a decline of 4.4%. This was bad news for gold producers such as Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Limited (ASX: NCM). Their shares slumped by 17% and 7% respectively. In my view, Northern Star's outlook is uncertain even though it is improving as a business.

US interest rates

The fall in the price of gold last week could have been worse. It was given a boost by US jobs numbers on Friday which missed forecasts. The US economy added 156,000 jobs in September, which was less than estimates of a gain of 172,000. The jobless rate unexpectedly ticked higher to 5%. This means that the chances of a US interest rate rise are reduced in the short run. It points to a US economy which may be too fragile to sustain higher rates. Stubbornly low inflation and a disappointing pace of output growth in the first half of the year back up this viewpoint.

However, in my view interest rate rises are inevitable. The Federal Reserve may not raise interest rates before the end of the year, but the majority of US economic data remains upbeat. For example, manufacturing data and US services sector data were strong in September.

An interest rate rise would be bad news for Northern Star because it would make interest-producing assets more appealing relative to gold. This could cause demand for gold to fall and push its price downwards over the medium term.

An improving business

Northern Star has become an improved business in recent years. For example, in the 2016 financial year its all-in sustaining costs continued to fall. They averaged $1,041 per ounce and could fall further following the sale of the Plutonic gold mine. That's because Northern Star's remaining four key operational centres have significant production and exploration scale. This could boost Northern Star's reserves over the medium term following its 33% rise in reserves in the 2016 financial year.

Further, Northern Star has sound finances. It has no bank debt as well as a cash pile of $326 million. This reduces its risk profile and will allow for greater investment over the medium term as it seeks to increase production to 600,000 ounces per annum by 2018.

Outlook

However, Northern Star's focus on gold means that it lacks the diversification of other resources companies such as BHP Billiton Limited (ASX: BHP). This equates to a higher risk profile for Northern Star. Its valuation also lacks appeal. For example, it has a price to book ratio of 5.1 versus 1.5 for the materials sector. Alongside an uncertain outlook for the gold price, this makes it a stock to avoid in my view.

The post Is now the time to buy Northern Star Resources Ltd shares? appeared first on The Motley Fool Australia.

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Having fallen by 38% in 2015, BHP Billiton Limited (ASX: BHP) has made a strong comeback in 2016. Its shares have risen by 29% year-to-date to above $23. That's ahead of resources peers Rio Tinto Limited (ASX: RIO) and Woodside Petroleum Limited (ASX: WPL). They are up by 16% and 2% respectively in 2016.

But in my view, BHP Billiton could endure a difficult period over the medium term.

Bearish forecasts

A key reason for BHP's uncertain future is a bearish outlook for iron ore. The steelmaking ingredient hit a high of over US$60 per tonne this year but has since pulled back to below US$55 per tonne. This is despite China's imports of iron ore increasing in September to 82.5 million tonnes. That's 2.5% higher than August's level and shows there is little sign of a slowdown in demand from the world's largest importer of iron ore.

However, the iron ore price is likely to fall as China trims its steel market overcapacity. Alongside restrictions on the property market, this should cause demand for steel (and iron ore) to fall. In tandem with demand side challenges, iron ore is set to experience a rise in supply in 2017 and 2018.

The world's largest iron ore producer, Vale, is on track to commence production from its S11D project in January. This could see an additional 90 million metric tons of iron ore shipped per year. Further, the Roy Hill mine is expected to add 56 million tons to global supply. This mix of reduced demand and increased supply of iron ore could cause BHP Billiton's financial performance to worsen.

Diversity

One of BHP's main appeals versus its resources peers is its diversity. However, the outlook for oil means that diversity may not reduce BHP's overall risk profile. Even though OPEC has agreed to cut production by upwards of 700,000 barrels of oil per day (bopd), the details of the agreement have not been finalised. While the price of oil may be supported until the end of November, there is the potential for a fall if OPEC cannot decide which members will cut production and by how much.

Similarly, the outlook for the copper price is so bearish that the world's largest copper miner, Codelco, has cut its investment programme. Its 5-year US$25 billion investment plans have been reduced by a further US$2.25 billion. Codelco has called the current copper price outlook as the worst crisis since the company was created in 1976. In my view, further price falls cannot be ruled out and they would hurt BHP's financial performance.

Looking ahead

As well as a challenging outlook for BHP's three main divisions (iron ore, oil and copper), the company's shares lack a margin of safety. BHP sports a P/E ratio of 27 using the 2017 financial year's forecasts. This compares to a P/E for the materials sector of 12.6. Therefore, I believe that BHP's share price gains thus far in 2016 are unlikely to be repeated in future.

The post Is the BHP Billiton Limited share price heading higher? appeared first on The Motley Fool Australia.

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An ageing population presents the healthcare sector with a long term growth opportunity. It could act as a positive catalyst for the share prices of healthcare companies CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH). That's because their target market size should rise in future. In CSL's case, its competitive advantage and financial strength are two other key reasons to buy it right now.

Ageing population

Between now and 2050 the number of people aged 60 or over is expected to rise by over 100% to 2.1 billion people. Within the 'oldest-old' person category, the number of people aged 80 or over is set to see even faster growth. Their number is forecast to triple to 434 million by 2050. This provides CSL with a growing market for its products, since illness and chronic conditions are more prevalent in the 60 and over (and especially 80 and over) age bracket.

Further, illnesses such as influenza can be more serious in older people. Between 5% and 15% of the world's population contracts influenza each year and a growing number of older people mean that demand for influenza vaccines is likely to rise. This puts CSL's Seqirus division in a strong position to capitalise on a demographic tailwind over the long run.

Financial standing

CSL's acquisition of Seqirus has strengthened its long term growth outlook. Its financial standing provides further opportunity for M&A activity. Evidence of this can be seen in the company's cash flow and balance sheet strength.

For example, CSL has a net debt to equity ratio of 100%. This could move higher in my view. That's because CSL has a low positive correlation with the performance of the wider economy. This means that its risk profile is lower than for many of its index peers which indicates higher levels of debt can be accommodated on its balance sheet. CSL's net operating cash flow covered finance costs 21 times in the 2016 financial year. This shows that it could afford to borrow more to fund acquisitions even if the rate of interest increased over the medium term.

Competitive advantage

CSL's financial strength also allows it to invest heavily in R&D. This provides the company with a competitive advantage over rivals since the barriers to entry in a number of its key markets are high. For example, CSL has spent over US$2.3 billion on R&D over the last five years. This strengthens its economic moat versus peers.

CSL has also invested in improving the efficiency of its operating processes. This keeps its costs lower than for many of its sector peers and has contributed to a return on invested capital which is consistently above 20%. This improves the company's competitive advantage and reduces its overall risk profile.

Alongside its sound finances and an ageing population, CSL's competitive advantage is a reason to buy it now. However, before doing so, these three blue-chips are worth a closer look.

The post 3 reasons to buy CSL Limited appeared first on The Motley Fool Australia.

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Since Opec announced a cut in production on 28 September, crude oil prices have risen by over US$3 per barrel. This has improved investor sentiment towards oil stocks. Woodside Petroleum Limited (ASX: WPL) has risen by 9% in the last week. Its peers Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) are up by 13% and 11% respectively.

But in my view, Woodside faces a challenging long term outlook.

Positive news

The oil price has been boosted by US government data which showed a fifth straight week of declines in US crude inventories. They fell by 3 million barrels to a total of 499.7 million barrels in the week to 30 September. This has pushed Brent prices to their highest level since June.

Having a bigger impact on Brent prices has been Opec's deal to reduce output. It will cut production to between 32.5 million barrels of oil per day (bopd) and 33 million bopd. This represents a reduction of at least 700,000 bopd. The aim of the production cut is to reduce the imbalance between demand and supply after demand growth has proven to be slower than anticipated.

Reality check

The Opec deal does not signal the end of an era of lower oil prices yet. It may offer support to the price of oil between now and 30 November when Opec next meets. But the details on the size of cuts to be made by each Opec member have not yet been agreed. As such, a deal may continue to prove elusive and the price of oil could fall.

I'm also bearish on the prospects for oil even if the supply cut is confirmed in November. The International Energy Agency (IEA) stated last week that demand for oil is very weak. It could take many months and possibly years for supply and demand to move into equilibrium.

More problems

This would be bad news for Woodside. The company also faces a difficult outlook for LNG. It faces a mix of increasing supply and uncertain demand growth.

On the supply side, LNG production is forecast to rise by 50% over the next four years as new projects come onstream in Australia and the US. The demand side should be boosted by China's switch from coal power to LNG to improve air pollution. The two biggest importers of LNG, Japan and South Korea, are utilising other forms of energy. Japan has restarted five nuclear power reactors and South Korea could rely to a greater extent on coal over the medium term.

Looking ahead

The bearish outlook for LNG and oil prices could hurt Woodside's financial performance. Its shares could fall heavily in response since they lack a margin of safety. For example, Woodside has a forward P/E ratio of 24.9 using financial year 2016's forecasts. This compares to a P/E ratio of 19.9 for the wider energy sector. Despite the increased optimism surrounding the oil price, I believe that Woodside is a stock to avoid.

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In the last five years, Rio Tinto Limited's (ASX: RIO) shares have traded as high as $70 per share. Although the company's performance disappointed in 2014 and 2015, in 2016 it has recovered from a low of $37 to reach the current price of $51. However, in my view its future is uncertain and the chances of it returning to $70 per share are slim.

A rising market?

Rio Tinto's shares have risen sharply in 2016 due to an improved performance for iron ore. The steel-making ingredient has increased in price by around 30% since the start of the year. This has lifted the share prices of iron ore miners BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG). They are up by 28% and 158% respectively, which is ahead of Rio Tinto's 16% gain.

However, the outlook for iron ore prices is uncertain. Chinese demand for steel has increased by 7% versus last year. It is being driven by a revived housing sector in China which is forecast to remain buoyant until at least the end of 2017. However, this increased demand is expected to be more than offset by a rise in the supply of iron ore. For example, Brazil's Vale is expected to add 28 million tonnes of iron ore in 2017, while the 56 million tonnes per year Roy Hill mine is due to come on stream in 2017/18.

Diversity

The effect of a further imbalance between supply and demand could send the price of iron ore downwards. This could negatively impact Rio Tinto's financial performance because of its dependence on iron ore. It accounted for 60% of operating profit in the first half of the 2016 financial year.

Although Rio Tinto is investing in other divisions such as aluminium and diamonds, the rate at which it is likely to diversity is relatively slow. That's because it has cut back on capital expenditure. For example, in the first half of the 2016 financial year, Rio Tinto reduced capital expenditure by 47% to US$1.3 billion.

In my view, this hurts Rio Tinto's long term growth prospects since US$0.7 billion of the amount was sustaining capital expenditure. This leaves limited cash available to develop other assets and create new income streams in areas other than iron ore.

Outlook

Rio Tinto has sound finances. Its gearing ratio of 23% was 1% down on the previous year and remains within the lower half of the targeted range. Therefore, it is highly likely to survive a downturn in iron ore prices, should it arise.

However, its lack of diversity and the rapidly increasing supply of iron ore mean that I'm bearish on its future prospects. Given that Rio Tinto has a P/E ratio of 16.5 versus 12.5 for the materials sector, I think that its share price is unlikely to rise to $70.

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Since the start of the year, Cochlear Limited (ASX: COH) has risen by 49%. That's ahead of healthcare peers Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX: CSL). They are up by 16% and 2% respectively. Cochlear's rapid gain may lead some investors to question if it is now overpriced. But in my view, its outlook is bright.

Demographic trends

A key reason for Cochlear's bright long term future is global demographic trends. The world's population is forecast to rise from 7.3 billion today to 9.7 billion by 2050 according to the UN. The rate of growth of people aged 60 or above is expected to be even more dramatic. Their number is due to double by 2050 and treble by 2100. Alongside a rising life expectancy, this means that demand for healthcare products and services should rise.

This is good news for Cochlear, since older people are more likely to require hearing devices. It will increase the size of Cochlear's target market and should provide a growing customer base without Cochlear being required to increase its market share from current levels.

Increasing sales

However, an increase in Cochlear's market share is on the cards. The company currently only supplies 1% of its total target market. As wealth levels across the developing world rise, it is likely that this figure will increase as hearing devices become more affordable.

Further, Cochlear has an excellent reputation among consumers. This provides a competitive advantage versus its peers. Its product recall in 2011 was initially viewed as a negative by investors. Cochlear's shares plunged by over a third in the aftermath but have since recovered. The recall is now seen as a prudent and conservative move by Cochlear which put customers, rather than the company's bottom line, first. This has enhanced the company's reputation and created a significant amount of customer loyalty towards Cochlear products.

Outlook

Cochlear is focused on expanding its technological advantage versus rivals in the near term. Over the next 18 months, it expects to introduce a series of new products which focus on both share and market growth. It will also build on its direct-to-customer marketing strategy in the US to increase awareness of hearing loss. Learnings from the US market are now being employed globally.

Allied to this strategy is a growing market for Cochlear's products as a result of population growth and an ageing population. Further, its reputation means that market share gains are relatively likely. In my view now is the right time to buy Cochlear for the long term.

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Gold prices have hit a two-week low. The precious metal is now priced at US$1307 per ounce after falling by US$4 yesterday. This is bad news for gold miner Newcrest Mining Limited (ASX: NCM). In my view, the outlook for gold and for Newcrest is bearish due in large part to an improving US economy.

Interest rate outlook

The US dollar has firmed up in recent trading sessions thanks to positive economic data. The US purchasing managers' index beat forecasts and came in at 51.5 versus expectations of 51.4. The Institute for Supply Management's manufacturing index for September was 51.5, which was ahead of the forecast 50.4. This provides further evidence that the US economic recovery is continuing and it could lead to a rise in US interest rates.

Further, US jobs data is due on Friday. If the numbers are as expected and the US has added 174,000 more jobs to keep the unemployment rate at 4.9%, the chances of an interest rate rise before the end of the year will increase. This is likely to have a negative impact on the price of gold. That's because the opportunity cost of holding gold versus income-producing assets will increase.

A rising US interest rate will also cause the US dollar to strengthen. This will have a negative impact on the price of gold and could hurt Newcrest's financial performance. This is due to Newcrest relying on gold for 85% of its sales. That makes the company far less diversified than sector peers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Risks

Gold bulls will counter the above with a number of risks which the global economy faces. For example, the US Presidential election is a key risk to the macroeconomic outlook, as is Brexit and the performance of the Eurozone. If such risks were to bear fruit then as a perceived safe haven, demand for gold could increase.

However, these risks could already be priced in to Newcrest's valuation. For example, it trades on a P/E ratio of 39.8 which falls to 26.6 when using financial year 2018's earnings per share forecast. This compares to a P/E ratio of 13.5 for the wider materials sector. In my view, this indicates that investor sentiment towards Newcrest is high and the share price appears to lack a margin of safety.

The market expects US interest rates to increase from 0.5% today to 2.25% by 2020. In my view, this rise will act as a constant drag on the gold price and on Newcrest's financial performance. The company is in better shape than a few years ago thanks to generating efficiencies and cost cutting. For example, in the 2016 financial year Newcrest reduced its all-in sustaining cost per ounce by 2%. This helped it to reduce net debt by 27% to US$2.1 billion.

Outlook

The bearish outlook for gold combined with Newcrest's lack of diversity and high valuation mean that I think it is a stock to avoid. I feel that investors should look elsewhere if they wish to turn $10,600 into $8 million, as this investor did.

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The oil price broke through US$50 per barrel this week.

That's the first time that Brent has been above US$50 per barrel since late August and it now trades at a three-month high. This follows a deal between Opec members which will see output reduced. This may seem like good news for oil stocks Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH).

In my view, Santos could struggle to record share price gains over the medium term.

Opec production cut

Opec has agreed to reduce output from 33.5 million barrels of oil per day (bopd) to between 32.5 million bopd and 33 million bopd. Although this has caused the oil price to rise in recent days, in my view it will have only a marginal impact on the price of oil over the medium term.

That's because it is only a small cut in production. Supply is still likely to exceed demand over the medium term. The International Energy Agency (IEA) estimated in April that the supply overhang was 1.5 million bopd. Since then production has increased to its highest level in recent history, while demand growth has been sluggish.

Uncertain outlook

Further, the details of the Opec deal have not yet been finalised. A decision on how much each individual member will cut its production will be decided at the planned meeting in November. This  means there is still a risk that a deal will not go ahead. This could send the oil price downwards in Q4 and in 2017, which may hurt Santos' financial performance.

Beyond that, demand for oil may prove to be below previous expectations. The IEA stated last week that demand was weaker than many people had thought. Even if a deal to cut production is in place following November's Opec meeting, the outlook for the oil price is likely to be bearish.

LNG challenges

Alongside the potential for a weaker oil price, Santos faces the prospect of lower LNG prices. Although demand is forecast to rise over the medium term, it is expected to be outpaced by higher levels of supply.

For example, global LNG supplies are due to rise by over 10% per annum over the next four years as 130 million metric tonnes per annum are forecast to be added to global supply. In the last two years, demand for LNG has risen at an annualised rate of 5.4%. This means that the supply/demand imbalance which has put pressure on the LNG price in recent years looks set to worsen.

Outlook

Santos faces an uncertain future. The prices of LNG and oil could fall and this would leave its financial position in a worse state. It has made progress in reducing upstream production costs by 15% in the first half of 2016 and has adopted a more disciplined capital expenditure programme. Due to its status as a price taker and the downbeat outlook for oil and LNG prices, I think now is not the time to buy into the company.

Despite this, there are stocks in the ASX which could help you to turn $10,600 into $8 million – just as this investor did.

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Investor sentiment towards iron ore miners has improved since the start of the year. This has pushed Fortescue Metals Group Limited (ASX: FMG), Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) higher. Rio Tinto is up 16%, BHP Billiton is 27% higher and Fortescue has risen by 161% year to date. Although demand for iron ore has firmed up this year, I believe that the steel-making ingredient and iron ore-focused Fortescue face an uncertain future.

Increasing demand

A key reason for improved investor sentiment towards iron ore miners such as Fortescue is increased demand from China. Stainless steel production in China has increased by 7% year-on-year. This is due to Chinese government stimulus which has boosted the construction industry. This has caused the price of iron ore to rise by 30% to US$56 per tonne. In the short run, further demand increases could take place in China and across Asia as favourable economic policies act as positive catalysts.

Increasing supply

Alongside rising demand for iron ore is a forecast for a faster increase in supply. Brazil and Australia are expected to increase their iron ore production by 200 million tonnes between now and 2020. This includes major projects such as Vale's ramp-up in production at its S11D project. This means that there is likely to be a glut in supply of iron ore. According to Fitch, the price of iron ore will decline to US$45 per tonne over the medium term. This would hurt the financial performance of Fortescue.

Further, accidents at iron ore operations in Brazil, as well as weather-related disruptions, have caused restricted supply in 2016. This has contributed to the price rise of iron ore. Once these one-off factors are removed, I believe that the price of iron ore will come under more pressure.

Outlook

Although Chinese stimulus has boosted its construction industry, the outlook for China's housing market is uncertain. Several Chinese cities have recently restricted home purchases in an attempt to cool a rapidly overheating property market. This could cause demand for steel to fall as housing transactions decline in number.

This is expected to contribute to an increase in the oversupply of iron ore between 2016 and 2018. The global surplus is forecast to rise to 56 million tonnes per annum by 2018 from today's 20 million tonnes per annum.

Finances

Fortescue has made real progress in cutting its cost base. Its operating costs declined by 43% in the 2016 financial year and its debt level was reduced by US$2.8 billion to US$6.8 billion. However, its interest coverage ratio was 2.7 in the 2016 financial year. This shows that a reduction in the price of iron ore could lead to financial difficulties even if Fortescue can cut costs even further.

Its debt is also US-denominated. There is potential for the US dollar to strengthen due to forecast interest rate rises. This could put Fortescue's financial position under greater stress through making debt repayments more expensive.

Although iron ore has experienced an improved performance in 2016, in my view an increase in supply plus uncertain demand will cause its medium-term performance to disappoint. Fortescue's status as a single commodity mining company with high debt levels means that it is a stock I'm avoiding.

The post Why I'm avoiding Fortescue Metals Group Limited appeared first on The Motley Fool Australia.

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