Company Analysis: BHP Billiton Ltd.

BHP Billiton, the world's largest mining company has reported better than expected earnings, recovering sharply from a troubled market environment enclaved by a glut of supply and slowdown in Chinese economic growth. 

The company's main contributing commodities all performed outstandingly as capital expenditure cuts have gone a long way in shoring up investors confidence who have seen the move as eliminating short term surpluses. 

Needless to say the overcapacity that's plagued the industry for an extended period of time remains a major concern for management whose hesitancy to mark the bottom of the downward cycle has led to the board to take a cautious approach in their strategic decisions, citing political uncertainty as a prime risk factor.

An excerpt from BHP Billiton's 1H 2017 results presentation.
For more info go to: http://www.bhpbilliton.com/-/media/documents/media/reports-and-presentations/2017/170221_bhpbillitonresultsforthehalfyearended31december2016_presentation.pdf?la=en 

Prospects

On the prospects of iron ore and metallurgical coal, these markets have experienced a rejuvenation of buying, especially from China whose government has drastically cut away from using subsidies to prop up state-owned mines in the sector. 

The Chinese government is under particular pressure to shape up it's fiscal affairs accordingly after years of using debt as a stimulus for growth which has left the government in danger of falling into the same fate as its counterparts Japan.

Because of China's increased focus on fiscal consolidation, it's likely that the country's mining ambitions and sponsorships will be kept to a minimum, opening the passage for global resources companies to once again take the reigns and supply the commodities market. 

In respect of the two commodities mentioned above, the combined percentage of contribution to EBITDA is 60% which bodes positively for the company. 

When looking at oil, the horizon becomes more blurred when contemplating the effects of an expectant(now implemented) production cuts by OPEC and Non-OPEC countries. 

The price has responded as most would've assumed however comments made by the Saudi Arabian oil minister pertaining to the need to extend the current agreement has left uncertainty together with evidence building that US shale gas producers are resuming production, effectively offsetting any cuts made.  

Financial Analysis

Apart from underlying profits surging past estimates, the company announced a dividend of 40 cents compared to an expected 30 cents, increasing the payout to 2.5 times of the previous dividend, leaving a strong indication of healthier cash flows. 

The announcement of a reduction in debt by $2.5 billion from a bond buyback program sweetened the results with the company currently sitting with debt levels just over $20 billion after wiping off a fifth of it's debt in the last year.  

BHP Billiton Ltd., the world’s biggest mining company, said first-half profit jumped more than sevenfold.#METLhttps://t.co/McGfMpI206 pic.twitter.com/2BkZZD7C5Y

— BN Commodities (@BNCommodities) February 21, 2017 

 A further reduction in debt signals management's cautious nature given the measure of losses absorbed during a difficult period, as well as lending a favour to the CFO to trim back on the vulnerability the company may find itself in.

The move could also be seen as the company expecting a rise in interest rates, specifically in the US which should see more profits feed into the bottom line.