Commodities price pressure is affecting cash flow. This leaves the dividend of US$1.21/sh (US$6.5bn) uncovered unless BHPB can cut US$2-3bn in capex without affecting volumes. However, the strong balance sheet should allow BHPB to continue paying even an uncovered dividend for several years.
On spot commodity prices, BHPB trades on high earnings multiples vs international peers: 27x P/E and 9.8x EV/EBITDA FY16e, which reflects a market view for rising oil prices and the strong balance sheet.
Operationally, the most challenging business remains US Onshore oil. High grading, cost and capital efficiency, as well as higher recovery rates, are the key drivers. Recently announced capex cuts will not be enough to make the business FCF positive, we estimate. Higher prices are needed.
The spin-off of South32 will not be a big valuation trigger, in our view. It is a trigger for further cost cuts at the parent that could add c.US$0.5-1.0bn to EBITDA; this is in our bull case.
BHPB has medium- to long-term brownfield growth opportunities in copper at Spence Hypogene and Olympic Dam phase 2. These projects are substantially value and FCF accretive in our base case. Unfortunately, production starts early to mid next decade.
Risks to Achieving Price Target
* Project execution: Jansen potash, Escondida growth, Spence hypogene, Olympic Dam.
* US$4bn in cost savings including US$2.6bn reductions in cash costs.
* Reduce capex to maintain balance sheet strength and pay base dividend.
Credit Suisse is also neutral and has the same price target of $34. Here are Morgan's investment metrics: