BHP Billiton: Australian Turnaround

10/02/2017 5:00 am EST


James Pearce

Director of Research, Investing Daily

One year removed from the most unprofitable year in its more than 100-year history, Australian mining and oil company BHP Billiton (BHP) reported a $6.7 billion fiscal year profit in August as evidence that its restructuring efforts are starting to pay off, asserts Jim Pearce, editor of Investing Daily's Personal Finance.

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I added BHP Billiton to our Growth Portfolio last April on the belief that it would soon benefit from growing demand for the basic materials it produces from the burgeoning middle-class populations in China and India.

That’s one reason why the company has announced it will sell its shale oil assets located in the United States, since exporting oil and gas from half-way around the world isn’t as profitable as shipping it from nearby Australia, where Billiton is headquartered.


After decades of expanding its portfolio to include a wide array of commodities and geographies, the company is returning to its roots as a regional supplier of iron ore and coal to its neighbors in Asia.

After selling off non-core assets over the past couple of years, BHP used the net proceeds from those sales to pay down $98 billion in debt last year to improve cash flow.

As a result, its free cash flow more than tripled, from $3.4 billion in 2016 to $12.6 billion this year. That allowed the company to return $4.4 billion to shareholders in dividends and repurchase stock, compared to $1.6 billion during the prior year.

BHP is valuable as a portfolio diversifier since it is one of the few international large-cap stocks that will have little direct exposure to the U.S. economy once it unloads its American oil assets.

That hurt BHP during the past eight years when the U.S. stock market was leading the global economy out of the Great Recession, but will help when our stock market cools off and investors begin looking overseas for growth stocks.

It will take several more quarters of improving performance for people to start thinking of BHP as a growth stock since it has long been viewed primarily as an inflation hedge and income play.

But now that its balance sheet and income statement are once again healthy, BHP’s stated objective for the coming year is to increase its return on capital from 10% to at least 11%, and raise it to 20% by the year 2022. If Billiton can accomplish those goals, its share price could easily double over the next five years.

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