New low in oil prices drags BHP Billiton stock below 2009 levels

New low in oil prices drags BHP Billiton stock below 2009 levels

Fayetteville Shale, Arkansas, U.S. (Image courtesy of BHP Billiton)

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%.

New low in oil prices drags BHP Billiton stock below 2009 levels

Source: Google Finance.

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.