Standard & Poor’s has raised its BHP Billiton outlook to stable from negative because of the miner’s “exceptional liquidity” and a better outlook for commodities prices, saying BHP will have excess cash to pay down more debt and make returns to shareholders.
And the ratings agency has flagged a potential upgrade of BHP’s “A” rating if the company’s Houston-based oil and gas division can start contributing and the board keeps a choke on big capital returns, big acquisitions and big new projects. In February last year, S&P cut BHP’s rating to A from A+ with a negative outlook on the back of lower commodities price forecasts. This added to pressure on BHP to abandon its progressive dividend policy, which it did two weeks later.
But last week, S&P raised 2017 price assumptions on iron ore by $US10 a tonne to $US55, against current spot prices of $US80, and that of copper from $US4600 a tonne to $US5070, against current spot prices of about $US5800.
“The (BHP) outlook revision mirrors the improvement in our forecast for commodity prices, which should notably strengthen the company’s cash flow generation capacity,” S&P said on the weekend. “We now assess BHP Billiton’s liquidity as exceptional, taking on board the company’s sizeable cash on balance sheet, as well as relatively limited debt maturities and positive discretionary cash flow in the next few years.”
S&P did not mention it, but the revision could bode well for Rio Tinto, whose liquidity was described as “exceptional” back in August, when S&P revised the outlook on Rio’s A- rating to stable.
It then noted that a $US5 per tonne increase in its then 2017 iron ore price forecast of $US45 a tonne would add $US1.2 billion to Rio’s pre-tax earnings, meaning the latest price forecasts indicate a $US2.4bn increase.
S&P said BHP’s oil and gas unit was seen as a ratings strength because of the diversification it provided, but that the business, which is weighed down by $US20bn of 2011 US shale acquisitions, was expected to provide very little in the way of near-term cash flow.
“Some evidence that the diversification is supported by a higher contribution from the petroleum business to the cash flows would be a contributing factor to a potentially higher rating,” S&P said.
After an expected $US2bn to $US3bn of dividend payments in 2016-17 (including the final 2016 dividend and interim 2017 dividend), BHP would still have “sizeable excess cash for other priorities such as further debt reduction and additional returns to shareholders,” the agency said.
On the other hand, negative pressure could develop if the company makes more dividend payments, increases capital spending or makes material acquisitions while its cash flow was at current levels.
The upgraded outlook comes as BHP readies to report second quarter production on Wednesday. UBS analysts expect BHP to boost iron ore production from its West Australian mines by 3 per cent from the previous quarter to 59 million tonnes, while petroleum is expected to slip 8 per cent from the previous quarter to 50.2 million barrels of oil equivalent.