Stock of the Day Why BHPs four billion was not enough

When $4.1bn in underlying half-year earnings and higher than expected dividends are not enough, market expectations have possibly run too far.

What’s priced in?

The stock fell as much as 5% on Tuesday despite the huge income. After recouping a bit, it was ending the week around 3% lower at the time of writing. Friday news that BHP and Exxon-owned Esso Australia would no longer sell some jointly owned oil fields in Australia didn’t help. But the essential pressure was largely down to questions around the credibility of further gains after the shares rose more than 100% in the two years up to the end of January.  That’s not as eye-watering as 200%-plus climbs by Glencore and Anglo, but the air for BHP stock is still getting thin as the disparity between what’s priced in and what it can plausibly achieve becomes glaring.

Margins

Take margins. Despite a 26% rise in earnings, these fell short of expectations. At least much of the reason for this was out of BHP’s hands though, for instance disruptions to coal operations in Queensland and higher costs from U.S. hurricanes. But the group is also getting more ambitious with expenditure amid signs investors are becoming wary again about a potential return by global miners to spendthrift ways. BHP’s costs rose in the first half largely due to one-off events, says the group.

Shale

More to investors’ liking is that the disposal of shale oil assets, a move coincidentally demanded by activist investor Elliott, looks on track. BHP’s CEO denies he has shifted stance to accommodate the antagonist. No budge on the other issue that Elliott is mad about, BHP’s dual-listing structure. All in, even under robust financial circumstances the group’s stock looks incongruously perched at almost twice the value of its balance sheet—which is around 12% higher than long-term intrinsic value. As we saw with Rio Tinto, which released earnings recently, investors are getting restive.  

Thoughts on BHP Billiton’s share price chart

Similar motifs to those visible in BHP’s London-listing can be found in its U.S. and Aussie shares. Chief among these this week has been a potential break of critical long-term support at 1514.19p. Should the share close for the week below here—something that last happened in 2014, with devastating follow through—a hairy ride will be in the offing. However, the fundamental picture does not appear to support a sustained decline. Support within the tight region of consolidation seen over the past year no lower than 1294p, looks more probable. The descending trend BHP definitively broke above in December could play a similar role, though the stock would still be facing a drift lower if it continues to fail above 1514p.