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BHP - Oil price boost from Saudi production disruption

Mining - 25 September 2019

For investors looking to play the recent oil disruption theme, BHP is one stock that benefits from higher oil prices. The pre-dawn attacks on 14 September knocked out more than half of Saudi Arabia’s output or 5% of global oil supply, which is 5.7m barrels per day. The Petroleum segment contributed 16.4% of Group EBITDA in F2019, which compares with iron ore at 48.0%. A $1/bbl change in oil has a not inconsiderable $40m impact on EBITDA if that applied for a full year. The biggest is iron ore with a $1/ton change from a base case having an approximate $230m impact up or down on EBITDA. We also alert investors to positive developments in the prices of nickel, gold and silver which benefit BHP. The F2020 forward gross dividend yield is 6.6%, falling to 4.7% in F2021. The one-year forward price earnings ratio is 10.9x, increasing to 15.2x in F2021. On a DCF basis, which allows for the variability in commodities, our fair value DCF is $22.33 or AUD32.83 at an exchange rate of AUD1.47/$. This translates to £15.72 on the LSE (including a 12% discount) and R293 per share on the JSE at an exchange rate of ZAR18.61/£. For traders, the stock is a little on the high side relative to our through-thecycle fair value but not unreasonably so given the commodity drivers we refer to in this note. We recommend traders either take short positions or sell rallies

Trader: R15.00

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