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BHP Group (BHP) Sees '21 Earnings Growth, Nears Petroleum Exit

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BHP Group (BHP - Free Report) reported underlying attributable profit of $17.1 billion in the fiscal 2021 (ended Jun 30, 2021), which was up 88% year over year, reflecting higher commodity prices and strong operational performance. Earnings per American Depositary Share (ADS) was $6.75 in fiscal 2021, up from $3.58 in fiscal 2020 but missed the Zacks Consensus Estimate of $6.93. Underlying earnings per share was $3.38, compared with $1.79 in fiscal 2020. The company’s each American Depositary Shares represents two fully-paid ordinary shares. It also made a flurry of announcements — to exit its oil and gas operations as it strikes a merger deal with Woodside Petroleum Ltd, approval of $5.7 billion in capital expenditure in Jansen Potash Mine in Canada and its decision to unify its dual-listed structure.

The company’s attributable profit amounted to $11.3 billion in fiscal 2021, including an exceptional loss of $5.8 billion. The exceptional loss was related to the impairments of potash and energy coal assets as well as the current year impact of the Samarco dam failure. Attributable profit in fiscal 2020 was $7.9 billion, which included an exceptional loss of $1.1 billion.

Revenues & Margin Performance

Revenues for fiscal 2021 totaled $60.8 billion, which beat the Zacks Consensus Estimate of $60.2 billion. It marked an improvement of 42%from revenues of $42.9 billion in the prior fiscal. The Iron ore segment’s revenues surged 66% year over year to $34 billion on higher prices and record production achieved at WAIO. Revenues in the Copper segment rose 47% to $15.7 billion, reflecting higher prices. Revenues in the Petroleum fell 3% year over year to $3.9 billion. The Coal segment’s revenues slumped 17% to $5 billion.

Adjusted profit from operations in fiscal 2021 soared 91% year over year to $30.3 billion owing to higher commodity prices and strong underlying operational performance, lower deferred stripping depletion at Escondida, lessened fuel and energy costs, and savings from the company’s cost reduction initiatives. Unfavorable impacts of exchange rate movements, copper grade decline, natural field decline in Petroleum, inflation, adverse weather and planned maintenance somewhat mitigated these impacts. Underlying earnings before interest, taxes, depreciation, and amortization (EBITDA) were $37.4 billion for fiscal 2021, up 69% year over year.

Balance Sheet & Cash Flow

Net operating cash flow for fiscal 2021 was $27.2 billion compared with $15.7 billion in fiscal 2020. This marked 15th consecutive year of generating net operating cash flow above the $15 billion mark. The company reported record free cash flow of $19.4 billion, courtesy of higher iron ore and copper prices, and a strong operational performance.

Cash and cash equivalents as of Jun 30, 2021 amounted to $15.2 billion, up from $13.4 billion at the end of fiscal 2020. Capital and exploration expenditure totaled $7.1 billion, down 7% from the prior fiscal. The company provided capital and exploration guidance at $7.1 billion for fiscal 2022. As of the end of fiscal 2021, net debt was $4 billion, substantially lower than $12 billion reported as of fiscal 2020. Backed by strong fiscal 2021 results, BHP Group’s board announced a record final dividend of $2.00 per share.

Other Updates

In fiscal 2021, the company successfully achieved first production at four major development projects — on or ahead of schedule and on budget. It acquired an additional 28% working interest in Shenzi in November 2020. The Shenzi North development, a two-well subsea tie-in to the Shenzi platform, was approved in August 2021. At the end of fiscal 2021, BHP Group had two major projects under development — Mad Dog Phase 2 in petroleum and Jansen mine shafts in potash.

Significant Announcements

BHP Group approved $5.7 billion in capital expenditure for the Jansen Stage 1 potash project. First ore is expected in 2027. Once operational, Jansen S1 is expected to produce approximately 4.35 million ton of potash per year. This will provide the company exposure to a commodity with a strong demand outlook and immense growth potential.

The company has agreed to pursue a merger of its Petroleum business with Woodside Petroleum Ltd, which will create a global top 10 independent energy company by production. The combined business will have a high margin oil portfolio and long life LNG assets. Woodside would issue new shares to be distributed to BHP Group’s shareholders. Woodside shareholders will own 52% of the merged group, while BHP Group’s shareholders owning the remaining 48%. Woodside and BHP Group have estimated annual synergies in excess of $400 million per year.  The Petroleum segment generated 6% of BHP Group’s fiscal 2021 revenues.

BHP Group intends to unify its corporate structure under its existing Australian parent company to realize simplification and enhanced strategic flexibility benefits.

Fiscal 2022 Production & Cost Guidance

In fiscal 2022, the company expects to produce between 249 Mt and 259 Mt of iron ore compared with 254 Mt produced in fiscal 2021 as WAIO continues to focus on incremental volume growth through productivity improvements. The petroleum production guidance is 99-106 MMboe. BHP Group anticipates copper production between 1,590 kt and 1,760 kt. Production guidance of Metallurgical coal for fiscal 2022 is at 39-44 Mt, while the same for energy coal is at 13-15 Mt. Nickel production is expected between 85 kt and 95 kt.
Conventional Petroleum unit cost is projected at $11-$12 per barrels of oil equivalent (boe) for fiscal 2022. Escondida unit cost is anticipated at $1.20-$1.40 per pound. Queensland Coal unit cost for the fiscal is expected at $80-$90 per ton. WAIO unit cost guidance is projected to be $17.50-$18.50 per ton.

The company expects demand for energy, metals and fertilizers to remain strong in the years to come, fueled by global economic growth, population growth and rising living standards. The near-term outlook, however, remains cloudy due to the uncertainties associated with the COVID-19 pandemic.

Price Performance

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BHP Group’s shares have gained 22.7% over the past year compared with the industry’s growth of 21%.

Zacks Rank & Other Key Picks

BHP Group currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other top-ranked stocks in the basic materials space include Avient Corporation (AVNT - Free Report) , Veritiv Corporation (VRTV - Free Report) and Commercial Metals Company (CMC - Free Report) . While Avient and Veritiv flaunt a Zacks Rank #1, Commercial Metals carries a Zacks Rank #2.

Avient has a projected earnings growth rate of 75% for 2021. The company’s shares have soared 92% in the past year.

Veritiv has an estimated earnings growth rate of 215% for the current year. Over the past year, the company’s shares have soared 340%.

Commercial Metals has an expected earnings growth rate of 32.8% for the current fiscal year. The company’s shares have gained 54% in a year’s time.

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