Today I’ll be taking a closer look at Anglo-Australian mining giant BHP Billiton (LSE: BLT), and multinational oil company Royal Dutch Shell (LSE: RDSB).
Should you invest in these FTSE 100 companies after recent news?
Lawsuit could spell disaster
News emerged yesterday that BHP Billiton has been hit by a $43bn lawsuit filed against its Samarco Mineracao unit, which is part-owned with Brazilian miner Vale. The lawsuit has been filed for social, environmental and economic compensation in relation to the failure of the Fundao tailings dam at the Samarco iron ore operation in Brazil on 5 November last year. The Samarco dam collapsed, causing a huge mudslide and river pollution, and led to the unfortunate deaths of 19 people.
In March this year the company announced that Samarco, Vale and BHP Billiton Brasil had agreed an $8bn clean-up programme with local authorities. The agreement provides a long-term remedial and compensation framework for responding to the impact of the tragedy. It also incorporates a requirement for community consultation on the remediation projects and compensation of the environment and communities affected by the tragedy.
The new $43bn lawsuit challenges the March agreement, with calculations based on costs caused in BP’s 2010 Deepwater Horizon oil-spill. In my opinion existing shareholders should be more than a little concerned, as BP’s share price has never recovered from the Deepwater Horizon disaster. Lawsuits can sometimes drag on for many years, and the mere mention of Deepwater Horizon will no doubt scare many potential investors away, me being one of them.
Fat & juicy yields
Multinational oil giant Royal Dutch Shell yesterday announced its first quarter results for the three months to the end of March 2016. The Anglo-Dutch oil major reported a massive 83% fall in earnings on a current cost of supply (CCS) basis to $814m, compared to $4.8bn for the same period a year earlier. After stripping out one-off exceptional items, CCS earnings fell to $1.55bn, 58% lower than the $3.74bn reported for the first quarter of 2015.
Management blamed the disappointing figures on continuing declines in oil, gas and liquefied natural gas prices, as well as weaker conditions in the refinery industry. The company plans to cut spending to $30bn this year, around 36% less than the combined capital investment by Shell and BG in 2014.
Shell trades on 24 times forecast earnings for this year, falling to 13 times for the year ending December 2018. Dividend payouts look very generous at current levels, with prospective yields of 7.3% and 7.2% forecast for the next two years.
The verdict
My view on BHP was bearish even before the recent news with the shares trading on very high earnings multiples of 91 and 33 for this year and next. After yesterday’s news, I think potential investors would need to be very brave or very contrarian to be interested in the stock — the rest of us mere mortals would be wise to stay well away.
Shell is trading at fair value in my opinion and I can’t see any reason for share price appreciation based on current earnings projections, unless the oil price recovers more quickly than expected. But the dividends are looking pretty irresistible for income seekers, with fat and juicy prospective yields in excess of 7%.
