Bhp Billiton interims

A diversified natural resources company and among the world’s largest producers of major commodities, including aluminium, coal, copper, iron ore, manganese, nickel, silver and uranium, and has substantial interests in oil and gas.  I have a holding in my income portfolio (epic code: BLT).

Bhp Billiton announced their interim results on 23 February and considering that the decline in commodity prices were only being partially offset by increased production and cost savings, were very much as expected.
  
Revenue at $29.9bn decreased by 11.9% and underlying operating profits were down 25.5% to $9.2bn. Underlying EPS was down 31% at $1.007 and the statutory diluted EPS was $0.8 down 47.3%. 

The biggest contributor to the $3.2bn reduction in underlying operating profits was falling commodity prices, reducing profits by $6.1bn, this was only partially off-set by $1.9bn from production increases and $2bn from cost savings that were reduced faster than expected.

The reductions in commodities are shown in the table below:

Click on table to enlarge

Most of the main commodities have continued to soften, most especially oil. In response to weaker prices, the Company will reduce its onshore US operated rig count from 26 at period end to 16 by the end of the 2015 financial year.  One of the benefits of onshore oil operations is the speed in being able to close down or start up operations that offshore does not have.

There was some very positive news on dividends - the interim dividend was increased by 5.1% to 62c and management stated that following the proposed demerger of South32, BHP Billiton will maintain its progressive dividend policy and any dividends from South32 will represent additional cash returns to shareholders.

Free cash flow was $3.6bn compared to $3.2bn last year and just covered the $3.6bn of dividends.  In a full year the company will lose about $1bn of free cash flow after the demerger of South32, so they will need to find this sum from efficiencies or increased production to cover the dividend payment.  Although with just 31.2% gearing ($24.9bn net debt), they do have substantial headroom to cover part of the dividend from debt if commodity prices remain low for a number of years.  

Managements guidance for their man commodities are that iron ore production for the current year remains unchanged at 225 Mt. Total copper production is under review following an electrical failure which caused a mill outage at Olympic Dam in February 2015. The mill is expected to be offline for approximately six months with an associated reduction in copper production of between 60 to 70 kt.  They will provide an update in the March 2015 Operational Review.  Petroleum production remains unchanged at 255 MMboe and metallurgical coal production remains unchanged at 47 Mt.

BLT has become an extremely low cost producer as demonstrated by the graphs below and this will support the company during what may be an extended period of low commodity prices.

1.Excludes freight and royalties. 

2.Includes freight and royalties.

3.Includes freight.

4.Includes freight; excludes treatment and refining charges.

 BLT's further planned cost reductions and improvements in productivity, their ability to reduce or increase onshore oil production quickly and their strong balance sheet, provides comfort that the company will be able to achieve its commitment of a progressive dividend policy.