Today’s operational update from BHP Billiton (LSE: BLT) (NYSE: BBL.US) comes during a hugely challenging period for the diversified commodities company. Falling oil and iron ore prices are severely impacting upon its bottom line and, in response, its share price has fallen by a whopping 25% in the last year alone.
However, looking ahead, it could be well-worth buying and could make a major impact on your portfolio returns this year.
Operational Update
The key takeaway from BHP’s operational update is that it plans to cut oil production. This seems to be a rather sensible step, since the price of oil has fallen dramatically as a result of oversupply and weaker than expected demand. Indeed, BHP expects to reduce the number of US shale oil rigs it operates from the current 26 to just 16 by the end of June 2015, although despite this move shale volumes are still forecast to rise by around 50% between now and then. In addition, BHP is set to cut its exploration budget by around 20% next year, which should free up cash to invest elsewhere in the business.
Despite the fall in the price of iron ore, BHP increased production in the final quarter of the year, with it reaching 56.4m tonnes. That’s a rise of 16% versus the same period in 2013 and shows that BHP is keen to maintain its market share at a time when peers such as Rio Tinto are doing the same. And, with BHP cutting costs and improving productivity, its cost curve remains relatively competitive, which bodes well for the company’s medium to long term future.
Looking Ahead
BHP also confirmed that it still plans to go ahead with the de-merger that will see a new independent company called South32 created by spinning off non-core assets such as silver, aluminium and manganese. This move could help to boost sentiment in BHP and, looking ahead, its shares could be worth buying at the present time.
That’s because they trade on a relatively low valuation and also offer excellent income prospects. For example, BHP trades on a forward price to earnings (P/E) ratio (that takes into account next year’s forecast fall in earnings) of just 12.4 and also yields a very appealing 5.1%. As such, and while the price of oil and iron ore may well fall further in the short run, BHP Billiton seems to offer a wide margin of safety and, as a result, could be a strong performer during the course of 2015.
