By Amanda Saunders
The $US6.5 billion ($9.1 billion) question ahead of BHP Billiton's full-year results on Tuesday afternoon is how the miner will protect its annual progressive dividend in the face of a painful commodity price rout.
When the results are announced on Tuesday afternoon about 4:15pm AEDT (just after market filings begin in London at 7am local time) investors will also be keen to see how the slimmed-down giant can expand, after spinning out South32, and a massive pullback at its US onshore division. The results come one day after BHP Billiton shares slumped 9.2 per cent in London trade, its worst day since November 2008, in Monday's plunging markets.
Short positions in BHP Billiton have grown on the back of weak commodity prices and concerns about the company's ability to maintain its progressive dividend. Credit: Stefan Postles
Analyst consensus expects BHP's underlying earnings to have declined by more than half to $US6.6 billion, ex-South32, compared with the year-earlier $US13.4 billion.
As UBS analyst Glyn Lawcock says, the big question everyone is asking whether BHP can protect its dividend, and ensure it is maintained.
"And if you believe they can, how they can do that – that's the billion dollar question," he told Fairfax Media.
Here are five things to watch out for in BHP's result:
1) GROWTH AND PRODUCTIVITY
Investors will want to know how BHP plans to reverse the "ex-growth" position it finds itself in for the first time in 15 years.
While costs cuts and productivity improvements will help shield its margins from the cash flow crunch, it faces years of being ex-growth unless oil and gas prices stage a big recovery, or it makes a major acquisition, Deutsche analyst Paul Young said.
Investors will also want to know if the miner will gear up to fund growth. As UBS analyst Glyn Lawcock says, it is a matter of semantics. Some investors argue BHP will gear up to fund its $US6.5 billion dividend, others argue that gearing up is to fund growth. BHP's cash flow covers its dividend and sustaining capital.
There is also desire for more clarity on how much productivity can save - and how - given chief executive Andrew Mackenzie won his leadership on the plan to spin-out "non-core" assets into South32.
UBS says BHP could provide updated guidance for group production growth on Tuesday, using financial 2015 as the new base year, which could see growth of between 0 and 5 per cent. But 2016 does look very tough - iron ore is the only of BHP's four key "pillar" commodities forecast to grow volumes in the year.
2) DIVIDEND
BHP is set to stick to its progressive dividend policy, which ensures the dividend is maintained or increased in US dollar at each half-year payment. Any move to cut the dividend, or change the policy, would blindside investors and analysts.
It will cost BHP about $US6.5 billion for financial 2015. Australian investors who argue it doesn't make sense for a resources company and restricts the miner from making countercyclical acquisitions or investments, while there is also a growing chorus of criticism out of London.
BHP is expected to keep its final dividend flat, at US62¢ a share, which is an underlying payout ratio of more than 150 per cent. That would put the full-year dividend at $US1.24 a share, up from $US1.21 last year.
While UBS does not expect BHP to cut its dividend, Mr Lawcock says it has a "range of levers" to support it, including increasing debt, reducing capex, cutting costs, deferring projects, selling assets, or paying its dividend in scrip.
3) CAPITAL SPENDING
BHP is expected to make fresh cuts to capital spending on its already heavily reduced 2016 target of $US9 billion. It has guided for $US12.6 billion for 2015. Rio, Glencore and Anglo American all unveiled capex cuts at their interim results earlier this month.
UBS is tipping 2016 capex of $US7.7 billion, and says the miner will likely reduce its guidance below $US9 billion, while Deutsche puts it at $US8 billion.
BHP's productivity drive is giving it more flexibility, as is big cuts to spending on its struggling US onshore oil and gas division, and deferral of a $US500 million inner harbour project, which would have seen the miner reach its ultimate 2017 expansion target of 290 million tonnes more quickly..
4) COST-CUTTING TARGET
Investors are expecting BHP to raise its three-year, cost-cutting target of $US4 billion by financial 2017. BHP said in February it was on track to have pulled out at least $US3 billion in the first 12 months. The big fall in the Australian dollar against the US currency - down more than 20 per cent in the past year - is accelerating the cost-cutting program. The oil price collapse - the price of Brent crude has fallen 60 per cent in the past 12 months - while squeezing profits on BHP's second-biggest earner, is also helping BHP reduce operating costs.
Net debt is also crucial. Net debt is expected to have crept back up to $US25.4 billion, from $US24.9 billion as of December 31.
5) M&A
Will Mr Mackenzie talk to the importance of M&A to growth? He has flagged possible acquisitions in copper and oil at a project level.
Deutsche's Mr Young has told The Australian Financial Review that if BHP's wants to revamp its oil business large-scale mergers or acquisitions were the only option to restore growth, unless oil and gas prices staged a big recovery.
"But if you look at the history, the question is, do they have the licence to do so?" he said.
"The world's biggest mining company, with very low-risk, tier-one assets, in low-risk jurisdictions, should not be in a position where they are ex-growth – the valuation opportunity for BHP has always been that they can grow while everyone else is not."
The global miner's decision to pull back from its ambitions in the US onshore shale oil and gas sector – because the division has been rendered largely unprofitable by the oil and gas price collapse – coupled with a decline in BHP's conventional oil production, had made the miner "ex-growth", Mr Young said.