New low in oil prices drags BHP Billiton stock below 2009 levels
Shares in BHP Billiton (ASX:BHP), the world’s largest mining company, were severely hurt Monday by what until now was still its strong point against rival Rio Tinto (LON:RIO)— its exposure to oil through its U.S.-based business.
The stock closed in Sydney at $29.27, or 5.3% lower than the previous session, marking the first time BHP tumbles below $30 in the last five years.
Analysts attributed the sharp drop to falling oil prices, which hit a five-year-low Monday, unable to find a bottom despite their biggest fall in roughly 30 months last week, when the Organization of Petroleum Exporting Countries (OPEC) held back from cutting output in the face of a supply glut.
U.S. crude dropped more than 3% to a five-year low of $64.10 per barrel, with the fall from June exceeding 40%. It later recovered to stand at $64.56, still down 2.4%.
Adding salt to the company' wounds, some of its key commodities such as copper and iron ore were also down.
The industrial metal dropped as low as $6,230.75, hitting its lowest levels since mid-2010, and closed in London at $6,245.50, down 1.7%. Iron ore began the week with a slight decline of 0.21% for 62% Fe fines.
The Australian explains why BHP’s stake in the oil market may soon make the diversified giant lose ground against Rio Tinto:
- The pain that sliding oil prices can reap on the bottom line of BHP’s petroleum unit was evident in a recent JPMorgan report that lowered oil price forecasts by about US$30 a barrel to US$81 in 2016 and US$83 for the year after.
- On top of increased exposure to oil prices, BHP’s entry into the US shale sector through US$20bn of acquisitions has brought it an ongoing US$4bn a year capital expenditure.
- The ongoing spend is a barrier to near-term increased shareholder returns that Rio does not have.
A 30% fall in oil prices, analysts from Citi and JPMorgan agree, would see BHP’s petroleum operating earning smashed by at least 84%.
BHP is the largest non-U.S. producer in the prolific Eagle Ford shale of Texas. Its operations in the Eagle Ford grew after it bought Petrohawk — the pioneer of production in the formation— three years ago.
The company’s shale oil production is expected to increase by 50% next year, reaching 200,000 barrels per day in 2017, up from about 125,000 b/d in the three months to September.