BHP Billiton. Mad Dog 2 gets FID AUSTRALIA/ UNITED KINGDOM/ SOUTH AFRICA. Event. Impact. Earnings and target price revision.

Transcription

1 AUSTRALIA/ UNITED KINGDOM/ SOUTH AFRICA BHP AU/BLT LN/BIL SJ Outperform Price (at 12:49, 02 Dec 2016 GMT) A$25.02/ 13.39/R Valuation A$ 20.74/ 12.25/R DCF (WACC 7.4%, beta 1.2, ERP 5.0%, RFR 3.3%) 12-month target A$ 28.00/ 15.30/R month TSR % Volatility Index Medium GICS sector Materials 30-day avg turnover A$m Combined market cap US$m 94,012 Number shares on issue m 3,212 Investment fundamentals Year end 30 Jun 2016A 2017E 2018E 2019E Revenue m 30,912 36,853 36,621 37,639 EBIT m 3,469 10,222 8,399 8,258 Reported profit m ,521 4,500 4,530 Adjusted profit m 1,215 5,521 4,500 4,530 Gross cashflow m 10,264 14,107 13,396 13,746 CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x BHP AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, December 2016 (all figures in USD unless noted, TP in AUD) 5 December 2016 Mad Dog 2 gets FID Event BP has announced it has approved the US$9bn development of the Mad Dog 2. Impact Mad Dog 2 gets approved: BP (BP/ LN, 4.70, Neutral, TP: 4.60, Iain Reid) reached a Final Investment Decision (FID) on Mad Dog 2. BP is the operator of the project, owning 60.5%, with BHP owning 23.9% and Chevron (CVX US, US$113.29, Neutral, TP: US$90.00, Iain Reid) 15.6%. We note that the JV partners have yet to announce FID but we see this as a formality. Production from late 2021: The Mad Dog 2 development will consist of up to 14 production wells and a new floating production platform with the capacity to produce 140kbopd. First production is expected to occur in late The capital cost of the development is estimated at US$9bn (BHP share US$2.2bn). Material upside risk to our base case at spot prices: Sustained strength in iron-ore and coking coal prices combined with the recent rally in oil prices has enhanced the upside risk to our base case using spot prices. We note that under a spot price scenario our earnings estimates rise over 50% for FY17 and nearly triple for FY18. Under a spot price scenario BHP generates US$2bn in additional free cash flow in FY17 and nearly US$8bn in FY18, translating to free cash flow yields of 10% and 15%, respectively. Earnings and target price revision We have incorporated the Mad Dog 2 development in our estimates for the first time. There is almost no impact on our EPS for the next five years as Mad Dog is not expected to commence production until FY22. We note that earnings rise ~4% from FY23 and beyond. We have left our price targets unchanged after incorporating Mad Dog 2. Price catalyst 12-month price target: A$28.00 based on an NPV - 8x EV/Ebitda blend methodology. Catalyst: BHP is set to report its 2QFY17 production report on 25 January and 1HFY17 earnings result on 21 February. Action and recommendation Maintain Outperform: The likely approval of the Mad Dog 2 project in 2016 was well flagged at BHP s Investor Briefing in October. The operating metrics and capex were broadly in line with our expectations. We view this as a positive announcement for BHP and note that the ~US$2bn Spence Growth Option, which extends the life of the 200ktpa Spence copper project by ~50 years, is also expected to be approved in Upside risk to our and consensus forecasts given the strength in spot commodity prices is expected to continue to underpin BHP s share price in the near term. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Fig 1 BHP Ebitda by division last five years Fig 2 BHP Ebitda by division next five years 2% 7% 14% 1% 29% 34% 42% 35% 20% Source: BHP, Macquarie Research, December 2016 Source: BHP, Macquarie Research, December 2016 Fig 3 BHP capex by division last five years Fig 4 BHP capex by division next five years 14% 5% 6% 2% 23% 36% 23% 49% 22% 20% Source: BHP, Macquarie Research, December 2016 Source: BHP, Macquarie Research, December 2016 Fig 5 BHP NPV by asset Macquarie forecasts Fig 6 BHP NPV by asset spot prices 15% 39% 17% 51% 45% and Potash 17% 8% and Potash 8% Source: Macquarie Research, December 2016 Source: Macquarie Research, December December

3 Fig 7 BHP summary financials ASX: BHP Price: (A$ps) Year end: Jun Rating: Outperform Up/dn TSR LSE: BLT Price: ( ps) Diluted shares (m) 5,323 ASX Target: % 15% JSE: BIL Price: (ZARps) LSE Target: % 22% Mkt cap: (US$m) 94,012 JSE Target: % 21% ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY20e ASSUMPTIONS FY14 FY15 FY16 FY17e FY18e FY19e FY20e FY21e Exchange Rate A$/US$ Commodity prices Exchange Rate USDBRL (US$/t) Exchange Rate USDZAR Hard coking coal (US$/t) RATIO ANALYSIS FY14 FY15 FY16 FY17e FY18e FY19e FY20e Thermal coal (US$/t) Diluted share capital m 5,338 5,333 5,322 5,323 5,323 5,323 5,323 (US$/lb) EPS (diluted and pre sig. items) US Nickel (US$/lb) P/E x 7.1x 51.8x 81.3x 17.9x 22.0x 21.8x 19.5x Brent Crude (US$/bbl) CFPS US West Texas (US$/bbl) P/CF x 5.3x 6.9x 12.5x 11.0x 10.8x 10.6x 9.6x Henry Hub (US$/mmbu) DPS US Dividend yield % 6.5% 6.7% 1.6% 3.1% 2.3% 2.3% 2.6% Production by commodity Franking Level % 100% 100% 100% 100% 100% 100% 100% Book value per share US$ps WAIO (mt) - 100% shipments P/Book value x 1.2x 1.4x 1.6x 1.6x 1.5x 1.4x 1.3x WAIO (mt) - BHP share R.O.E. (pre sig items) % 18% 6% -10% 10% 7% 7% 7% Samarco (mt) - BHP share R.O.A. (pre sig items) % 15% 10% 3% 8% 7% 6% 7% Total (mt) - BHP share Interest Cover x 19.4x 19.3x 3.4x 12.1x 10.8x 11.7x 14.8x EBITDA per share US$ps Coking coal (mt) - 100% EV/EBITDA x 3.7x 5.4x 9.7x 6.3x 6.7x 6.3x 4.2x Coking coal (mt) FCF Yield % 12% 7% 4% 8% 7% 7% 7% Thermal coal (mt) EARNINGS FY14 FY15 FY16 FY17e FY18e FY19e FY20e (kt) Revenue US$m 67,206 44,636 30,912 36,853 36,621 37,639 38,803 Escondida - (100%) 1,153 1, ,024 1,073 1,064 1,056 1,046 Operating Costs US$m (35,638) (22,761) (16,526) (18,776) (19,974) (20,776) (20,467) Cerro Colorado Operational EBITDA US$m 31,568 21,875 14,386 18,077 16,647 16,863 18,335 Spence Associates US$m 1, (2,104) Olympic Dam Corporate & Costs US$m (404) (571) 58 (201) (206) (211) (217) Antamina Underlying Ebitda US$m 32,359 21,852 12,340 18,233 16,841 17,095 18,585 Total (kt) 1,714 1,708 1,580 1,583 1,662 1,638 1,604 1,604 D&A & Impairments US$m (9,498) (9,986) (8,871) (8,011) (8,442) (8,837) (9,522) (mmboe) Underlying Ebit US$m 22,861 11,866 3,469 10,222 8,399 8,258 9,062 Conventional production Adjustments US$m 551 (3,196) (9,704) Unconventional Production Profit from Operations US$m 23,412 8,670 (6,235) 10,222 8,399 8,258 9,062 Total Net Interest US$m (1,176) (614) (1,024) (844) (778) (706) (614) Profit Before Tax US$m 22,236 8,056 (7,259) 9,379 7,621 7,552 8,448 EBITDA BY COMMODITY Tax Expense US$m (7,012) (3,666) 1,052 (3,283) (2,667) (2,643) (2,957) Net Earnings US$m 15,224 4,390 (6,207) 6,096 4,954 4,909 5,491 (US$bn) (US$bn) (US$bn) (US$bn). (US$bn) Discontinued operations US$m 0 (1,512) Minority interests US$m (1,392) (968) (178) (576) (453) (379) (431) Attributable Profit US$m 13,832 1,910 (6,385) 5,521 4,500 4,530 5,061 Adjustments US$m (385) 4,507 7, Underlying Profit US$m 13,447 6,417 1,215 5,521 4,500 4,530 5, CASHFLOW FY14 FY15 FY16 FY17e FY18e FY19e FY20e Net Earnings US$m 15,224 4,390 (6,207) 6,096 4,954 4,909 5,491 Interest/Tax/D&A US$m 9,034 11,720 15,113 6,698 7,284 7,753 8, Working Capital/other US$m 1,106 3,186 1,719 (656) 121 (155) (173) Net Operating Cashflow US$m 25,364 19,296 10,625 12,138 12,358 12,507 13,805 Capital Expenditure (cash basis) US$m (15,181) (11,581) (7,281) (4,583) (6,239) (6,028) (6,914) 15.0 Acquisitions/(Disposals) US$m 1, US$m (713) (1,573) (0) (0) Free cash flow US$m 11,352 6,142 3,380 7,655 6,119 6,480 6,890 Dividends US$m (6,387) (6,498) (4,130) (2,342) (2,608) (2,129) (2,342) Minority dividends & payments US$m 1,183 (501) (87) (576) (453) (379) (431) 5.0 New Equity US$m (354) (346) (106) Debt Drawdown/(Repayment) US$m (910) (931) 4, ,200 0 (1,200) 0.0 Net Financing Cashflow US$m (6,468) (8,276) 284 (2,917) (1,861) (2,508) (3,973) FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25e Net change in cash US$m 4,884 (2,134) 3,664 4,738 4,257 3,972 2,918 VALUATION BALANCE SHEET FY14 FY15 FY16 FY17e FY18e FY19e FY20e Projects US$m US$ A$m A$/sh GBPm GBP ZARm ZAR Cash US$m 8,803 6,753 10,319 15,057 19,314 23,286 26,203 17, , , , current assets US$m 13,493 9,616 7,395 9,131 8,811 9,221 9,677 53, , , , Property, Plant & Equipments US$m 108,787 94,072 83,975 80,978 78,775 78,967 80,359 18, , , , Non-current assets US$m 20,330 14,139 17,264 18,659 18,868 19,556 20,519 18, , , , Total Assets US$m 151, , , , , , ,758 Nickel West (720) (0.14) (960) (0.18) (567) (0.11) (10,077) (1.89) Debt US$m 34,589 31,170 36,421 36,421 37,621 37,621 36,421 Group and unallocated (1,117) (0.21) (1,489) (0.28) (879) (0.17) (15,635) (2.94) Payables US$m 10,258 7,418 5,402 6,670 6,436 6,736 7, liabilities US$m 21,184 15,447 17,059 17,025 14,831 16,793 20,022 Cash 12, , , , Total Net Assets / Equity US$m 85,382 70,545 60,071 63,709 66,880 69,879 73,246 Debt (36,421) (6.84) (48,561) (9.12) (28,678) (5.39) (509,894) (95.81) Net Debt / (Cash) US$m 25,786 24,417 26,102 21,364 18,307 14,335 10,218 Net Equity Value (WACC 10% Nom) 82, , , ,159, Gearing (net debt/(nd + equity)) % 23% 26% 30% 25% 21% 17% 12% Price Target (50/50 NPV and 8x EV/Ebitda) AUD GBP ZAR Gearing (net debt/equity) % 30% 35% 43% 34% 27% 21% 14% Source: BHP, Macquarie Research, December 2016; priced as of 2 December 5 December

4 Macquarie Quant View The quant model currently holds a strong positive view on. The strongest style exposure is Price Momentum, indicating this stock has had strong medium to long term returns which often persist into the future. The weakest style exposure is Growth, indicating this stock has weak historic and/or forecast growth. Growth metrics focus on both top and bottom line items. 165/1523 Global rank in Materials % of BUY recommendations 37% (7/19) Number of Price Target downgrades 9 Number of Price Target upgrades 8 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Materials) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score % -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple % -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Operating Leverage NTM Price to Sales NTM Net Buybacks to Mkt Cap 250d Volatility Dividend Yield FY1 Profit Margin NTM Dividend Yield NTM Piotroski Score -24% Negatives Positives -17% -17% -18% 25% -30% -20% -10% 0% 10% 20% 30% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/1523) Percentile relative to market(/423) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 5 December

5 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 September 2016 AU/NZ Asia RSA USA CA EUR Outperform 47.26% 55.50% 38.46% 45.47% 59.09% 48.21% (for US coverage by MCUSA, 8.20% of stocks followed are investment banking clients) Neutral 38.01% 29.31% 42.86% 48.77% 37.88% 36.79% (for US coverage by MCUSA, 8.25% of stocks followed are investment banking clients) Underperform 14.73% 15.19% 18.68% 5.76% 3.03% 15.00% (for US coverage by MCUSA, 8.00% of stocks followed are investment banking clients) BHP AU vs ASX 100, & rec history BLT LN vs FTSE 100, & rec history BIL SJ vs FTSE/JSE, & rec history (all figures in AUD currency unless noted) BP/ LN vs FTSE 100, & rec history (all figures in GBP currency unless noted) CVX US vs S&P 500, & rec history (all figures in ZAR currency unless noted) (all figures in GBP currency unless noted) (all figures in USD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, December month target price methodology BHP AU: A$28.00 based on a NPV - 8x EV/Ebitda blend methodology BLT LN: based on a NPV / 8x EV/Ebitda blend methodology BIL SJ: R based on a NPV / 8x EV/Ebitda blend methodology BP/ LN: 4.60 based on a DCF methodology CVX US: US$90.00 based on a DCF methodology Company-specific disclosures: BHP AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. BLT LN: Macquarie Bank Limited makes a market in the securities in respect of BHP Limited. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. BIL SJ: Macquarie Bank Limited makes a market in the securities in respect of BHP Limited. Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 12-Nov-2016 BHP AU Outperform A$ December

6 28-Oct-2016 BHP AU Outperform A$ Sep-2016 BHP AU Outperform A$ Sep-2016 BHP AU Outperform A$ Aug-2016 BHP AU Neutral A$ Jul-2016 BHP AU Underperform A$ Jun-2016 BHP AU Underperform A$ May-2016 BHP AU Underperform A$ Mar-2016 BHP AU Neutral A$ Jan-2016 BHP AU Neutral A$ Jan-2016 BHP AU Neutral A$ Jan-2016 BHP AU Neutral A$ Dec-2015 BHP AU Outperform A$ Nov-2015 BHP AU Outperform A$ Oct-2015 BHP AU Outperform A$ Sep-2015 BHP AU Outperform A$ Sep-2015 BHP AU Outperform A$ Jul-2015 BHP AU Outperform A$ Apr-2015 BHP AU Outperform A$ Mar-2015 BHP AU Outperform A$ Mar-2015 BHP AU Outperform A$ Feb-2015 BHP AU Outperform A$ Jan-2015 BHP AU Neutral A$ Sep-2014 BHP AU Neutral A$ Aug-2014 BHP AU Neutral A$ May-2014 BHP AU Outperform A$ Feb-2014 BHP AU Outperform A$43.00 Target price risk disclosures: BHP AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include BLT LN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include BIL SJ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include BP/ LN: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include CVX US: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. 5 December

7 This publication was disseminated on 02 December 2016 at 14:15 UTC. Macquarie Wealth Management The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 5 December