Shares in BHP Billiton (LSE: BLT), Fenner (LSE: FENR) and Ophir Energy (LSE: OPHR) have all fallen by about 30% so far this year.
The commodity sector is seriously out of favour at the moment — but this won’t last forever. Could buying at today’s prices provide bumper profits in a few years’ time, and form the basis of a healthy retirement portfolio?
BHP Billiton
Shares in BHP Billiton have fallen by nearly 10% since last week, when the tailings dam of BHP’s jointly owned Samarco iron ore mine in Brazil collapsed, killing at least four people and leaving 20 people missing.
At the moment, efforts are rightly focused on addressing the human tragedy and beginning to understand what went wrong. However, the financial impact of the disaster will also be significant. Estimates of the likely total cost to BHP vary from tens of millions to as much as $1bn.
Iron ore from the mine accounted for around 3% of BHP’s underlying operating profit, according to a statement from the firm. The loss of this income means that BHP’s free cash flow may not cover its planned dividend this year, forcing the firm to choose between cutting the payout and increasing borrowings.
Despite this, the majority of BHP’s assets remain attractive on a long-term basis. At less than 1,000p, I see the shares as a strong buy with good medium-term recovery potential.
Ophir Energy
Shares in oil and gas group Ophir Energy rose by 6% this morning after the firm said it was in the final stages of signing up future customers for its Fortuna liquefied natural gas (LNG) project in Equatorial Guinea.
Funding for the project is also being developed and is expected to include a mix of equity and debt funding to provide good upside for Ophir shareholders.
In the short-term, there was also good news. Full-year production from Ophir’s oil and gas fields in Asia is now expected to be around 12,700 barrels of oil equivalent per day (boepd), up from previous guidance of 11,000-12,500 boepd.
At 100p, Ophir shares trade at a discount of nearly 40% to the firm’s last reported book value. The firm’s undeveloped gas assets have the potential to create significant value for shareholders, but a long-term view is likely to be necessary.
Fenner
Shares in reinforced polymer technology firm Fenner fell by 8% this morning after the firm issued a profit warning for the current year alongside its results from last year.
The big problem for the group is the sustained decline in the US coal industry, which is a major buyer of Fenner’s heavy duty conveyor belts. Operating profit from Fenner’s conveyor business fell from £44m to £23.3m last year, despite better results elsewhere.
Fortunately, Fenner’s other division, Advanced Engineered Products, is doing better. Operating profit fell slightly from £43.6m to £41.0m, due to weakness in the oil and gas industry, but demand from the group’s medical and industrial customers remained strong.
Based on today’s profit warning, I estimate that Fenner’s underlying earnings per share are likely to fall to 9-10p next year. A cut to last year’s 12p dividend payout seems almost certain.
Fenner could be a good recovery play at some point, but now might be too soon to buy, in my view.
