Australia | Jul 26 2006
By Chris Shaw
BHP Billiton’s (BHP) quarterly production report shows the company remains on track to report record earnings of around US$10bn this year, though adjustments are being made to broker forecasts as the company is not meeting the market’s expectations in all areas of its operations.
The major disappointment from the quarterly was in the petroleum division, where the company guided to a flat production performance in FY07. Both Macquarie and Merrill Lynch pointed out such a result, which equates to production of about 116m barrels of oil equivalent, is below previous consensus estimates.
As a result, both brokers have cut their production forecast, Macquarie by 5% to 117m barrels and Merrills to 113m barrels from 124m barrels previously, the brokers pointing out consensus downgrades are likely to be larger given their estimates were below the previous market consensus.
Credit Suisse looks at the issue from the point of view of revenues, suggesting while production will be flat next year the division’s revenues may in fact rise thanks to ongoing strength in oil prices. The broker is also not overly concerned by the company revealing input and development costs have increased by as much as 30%, as it points out this also acts to limit new supply coming on stream and so is supportive of stronger for longer commodity prices. Merrill Lynch also suggested such an outcome was not a surprise, having previously factored a cost increase into its estimates.
Credit Suisse was more than happy with the production result overall as in its view the key was the company lifted production in key divisions that account for more than half of the group’s earnings. As a result, it has maintained its Outperform rating and share price target of $37.58.
Macquarie has been somewhat more conservative, as while maintaining an Outperform rating and target of $32.55 it has cut its 2007 profit forecast by 3% to US$11.8bn, which compares to its current year forecast of US$10.1bn. Its FY08 forecast has been reduced 2% to US$11.9bn.
Merrill Lynch has also trimmed its profit forecasts in FY06 by 1% to US$10.6bn and in FY07 by 4% to US$13.3bn, but notes the EPS impact in FY07 is only a fall of 2% given it is anticipating the company will announce US$2.5bn in capital management initiatives with its upcoming profit result. The broker continues to rate the stock as Buy with a target of $35.00.
The FN Arena database shows no broker has altered its rating on the stock as a result of the quarterly production report. This means BHP remains a favourite in the Australian market, the database showing it is rated as Buy by nine of the ten leading brokers and equity researchers and Accumulate by the other. The average price target is $35.10, which is below the median price target according to Thomson One Analytics of $36.70.
Thomson One shows median earnings estimates for the company stand at US$10.3bn in FY06, US$13.3bn in FY07 and US$12.6bn in FY08.
BHP shares today are down slightly at $27.70 after closing yesterday at $27.83.