Tuesday 23 February 2016 by Company updates

BHP bondholders the winners as dividend slashed by 75%


As expected, BHP has slashed its dividend and abandoned its progressive dividend policy. It’s a sensible move designed to protect the credit rating and has been well received by bond markets

BHP iron ore train

BHP Billiton ‘BHP’ has released its 1H16 results to the market, with a link to the ASX announcement available hereExternal link - opens in a new window.

Given falls in commodity prices a weaker result was expected. The real focus was on what BHP would do with its dividend and how the company would aim to preserve its credit rating. Today, BHP announced a major shift away from its progressive dividend policy. The new policy will be based on a minimum 50% dividend payout ratio. A payout ratio model makes a lot more sense given the cyclicality of the resources industry. The company announced a total interim dividend of USD0.16 per share versus USD0.62 per share in the prior period. In total, the dividend has been slashed by 74% or USD3.3bn on the prior interim period. Further, BHP has stated the dividend is covered by free cashflow thus won’t require additional borrowing to fund the expense.

In addition, BHP announced USD3bn in capital expenditure cuts over the next 18 months. Capital expenditure is now expected to be USD7bn in the current year and USD5bn in 2016/17.

Both measures aren’t shareholder friendly – they are prudent measures designed to preserve free cashflow generation recognising the ‘new order’ in commodity markets. BHP expects commodity prices to remain low as markets rebalance, with volatility to persist as the Chinese economy transitions. 

Please see a summary of the results below. We are more focused on the underlying results, given the statutory items reflect a number of non-cash items. These are asset impairments, in particular an impairment charge of USD4.9bn against the carrying value of the onshore US shale oil assets.

BHP half year financial summary 2016
Source: BHP Billiton

Key points:

  • Revenue fell 37% to USD15.7bn, underlying EBITDA was down 54% to USD6bn and underlying EBIT down 84% to USD1.3bn. Note the EBITDA margin of 40% remains market leading
  • Net operating cashflow of USD5.2bn was down 45% on the prior period
  • The company’s liquidity position is very strong, with USD11bn in cash plus USD6bn in a revolving credit facility
  • Net debt of USD25.9bn was up from USD24.4bn at 30 June 2015, and the gearing ratio was up to 29.7% from 25.7% at 30 June 2015 reflecting higher net debt write downs in asset values
  • USD1.2bn of free cashflow was generated over the last six months, and the company has stated it is free cashflow positive in FY16 based on February 2016 spot commodity prices
  • The Western Australian Iron Ore (WAIO) unit cash costs declined by 25% to USD15.21 per tonne, underpinned by a stronger US dollar, reductions in labour and contractor costs, and lower diesel prices and consumption. Total iron ore production for the 2016 financial year of 237 million tonnes is expected, 4% lower than prior guidance, reflecting the suspension of operations at its Brazilian Samarco joint venture
  • A total after tax charge of USD858m was recognised for the Samarco dam failure. BHP’s investment in Samarco has been written down to zero. Samarco continues to assess its environmental and socio-economic rehabilitation efforts. The magnitude and timing of any legal contingencies remains subject to a very high degree of uncertainty

Like most of the resources industry, BHP has been forced to change its entire strategy around capital and shareholder return. The focus has shifted from providing shareholders with a yield investment to one around protecting bondholders, the balance sheet and preserving credit ratings to minimise costs. The first to bear the brunt of this change are shareholders who bought the stock on the premise of an annuity income stream but  instead  face significant capital losses.

The company has a number of levers to protect its balance sheet position and we remain supportive of the credit. We believe the combination of the dividend cut and reduced capital expenditure plans will be enough to keep the rating agencies at bay in the absence of a further significant fall in commodity prices.

Since our last update on BHP, bond prices have rallied based on a mild recovery in commodity prices as well as the company’s decisive action on the dividend. The BHP subordinated bonds are currently offered at the following indicative yields to maturity:

Bond (click to view factsheet) Price Yield to first call
USD non-call 5 year $102.25 5.69%
USD non-call 10 year $100.80 6.63%
GBP non-call 7 year $99.75 6.54%
Euro non-call 9 year  $101.45  5.41% 

Please contact your FIIG representative for further information and current pricing levels on the BHP Billiton subordinated bonds. Pricing is indicative only, accurate as at 23 February 2016 and subject to change. Available to wholesale investors only.