First take on the BHP number and new CEO
On first glance, the surprise this morning will be the appointment of Andrew Mackenzie to the new CEO position. It is
very aggressive from a timing point-of-view; we knew it was coming, but this shows BHP is looking to get onto the front
foot with a division is has been keen to invest in over the last few years - petroleum. The expected candidate for the
role was Mike Yaeger, who is currently the Chief Executive of BHP’s non-ferrous business. However, Mr Mackenzie’s
credentials do speak for themselves, with over 30 years of experience in oil and gas as well as petroleum through
appointments with the likes of BP and Rio Tinto. He joined BHP in 2008 and is expected to be more investor friendly.
What is also interesting is that he will be based in Melbourne and not London, showing that management is looking to be
closer to the action with core assets being in the Pilbara and Queensland.
Turning to the numbers and on first blush they look strong compared to consensus. As expected year-on-year the results
are down, however stripping out impairments and lower commodity prices the forecast figures should be used for
comparison, not the corresponding half.
Headline figures show underlying EBIT was US$9.8 billion, well ahead of consensus of US$9.5 billion with underlying net
profit coming bang in line with consensus at $5.7 billion. The declared dividend was also right in line at $0.57, with
cash flow coming in at $6.4 billion as management states project are on time and on budget and thus should not bite into
this figure too much over the coming half.
What is very pleasing is the breakdown numbers. With 51% of EBIT coming from the lucrative iron ore division and after
delivering a record production report last month, BHP has managed to pull out a good beat on consensus here at $4.81
billion versus $4.716 billion expected - this is impressive considering the iron price over the last half of the year
dropped. What is now even more exciting is if the company can extract profit from the current iron prices on a
longer-term basis. Petroleum (29% of EBIT) also beat at $3.161 billion versus $2.814 billion predicted and with the
appointment of Andrew Mackenzie we can expect this figure to improve over the coming years.
One of the key themes for this result was going to be impairments. Management has announced that no impairments are to
be recorded for this half. This is a massive beat on peers; even with aluminium and nickel underperforming, the company
seems happy with the current goodwill of both metals. More importantly, US shale assets that have disappointed in the
past have been left untouched.
The other major theme from this report was going to be cash cost. BHP is looking to strip itself down into a leaner and
meaner operation and the $1.9 billion cash cost reduction on an annualised basis should impress analysts in particular.
The question for the market will be whether it concentrates on the fact that year-on-year BHP is down on headline
figures by up to 50% in the case of cash flow, whether the appointment of Andrew Mackenzie over others is the right
move, and if the aggressiveness of the appointment is a downside surprise. Or, will the market jump at the fact that
core assets delivered ahead of expectations, production continues to be at record levels, there is now a quality
investor-friendly CEO and costs look to be back on track. BHP is well positioned to take advantage of the Asian
expansion that is currently taking hold and is solidly placed to continue to expand into the ever-demanding energy
space. This is a good result; it’s up to the market now to see if it thinks so too.
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