Mixed 3Q result
Copper was again a highlight in the 3Q for BHP with metal production of 457kt (vs Morgans est. 438kt), with another strong performance from Escondida. WA iron ore production of 67mt (vs Morgans est 71mt) fell short of our estimates, with solid performances from Jimblebar and Mining Area C (MAC). Meanwhile, iron ore sales were negatively affected by unplanned car dumper issues caused by the bigger volumes. Group petroleum production similarly fell short of our estimate at 45mmboe (Morgans est. 48mmboe), with US onshore performing as expected while conventional fields were lower on a seasonal drop in Bass Strait volumes and field decline elsewhere.
Changes to guidance
FY18 petroleum guidance was unchanged but expected at the upper end of 180-190mmboe guidance on outperforming US onshore fields (large fracs in Permian, longer laterals in Eagle Ford and larger choke sizes in Hainsville). Copper guidance was narrowed to 1,700-1,785kt (from 1,655-1,790kt) with the midpoint rising. Iron ore guidance has been cut to 236-238mt (was 239-243mt) on the car dumper issues. Metallurgical and thermal coal guidance was unchanged.
Shale sale progressing
BHP reported its planned divestment of US onshore petroleum interests in progressing as planned, with bids expected by June 2018 with 'one or several transactions' expected in the December half. BHP has stated that it would consider asset swap opportunities, but only where an asset cleared its strict return criteria, while also exploring other options such as exit via demerger or IPO.
We oil prices trading at multi-year highs, we view the probability of BHP divesting its US onshore assets as having risen sharply.
More upside on offer
Following two years of solid share price growth, we still see further upside on offer from the combination of continued earnings growth and high probability for additional capital management. Additionally, we see the upgrade cycle as continuing with spot prices on a basket of BHP's major commodities trading well above Morgans and consensus forecasts.
We maintain our Add recommendation. The key risk to our call is commodity prices.
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Disclaimer(s): Analyst owns shares.
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