Does BHP Billiton Have Room to Run Higher?

Iron ore miners have rallied strongly and BHP Billiton (BHP) is no exception to this trend. Currently, it is expected that the iron ore market will take approximately ten years to balance out. Therefore, BHP Billiton has been shifting its emphasis on other market segments to produce earnings throughout a downturn in the commodity sector.

Meanwhile, BHP Billiton predicts the demand for energy coal will surge 10 percent to 15 percent by mid-2020s, primarily from Southeast Asian countries. Here, countries such as India will carry on to depend on low-cost energy coal as an inexpensive source of electricity production.
Therefore, to come across the surging need for coal, BHP Billiton will sustain sturdy levels of production.

However, the company has not shared the three year energy coal production estimate, but it anticipated an output of 34 million tonnes for 2016, a decline of 7 million tonnes compared to that in 2015. Therefore, BHP Billiton is mainly placing its focus on gradually increasing its energy coal output from New South Wales to 19 million tonnes in the imminent FY from 17 million tonnes in the existing FY.

In addition to this, the company is also planning to escalate metallurgical coal production to 46 million tonnes from 43 million tonnes for the next year. The company’s decision to surge production resides on the back of recent strength in coal prices, specifically in China where the commodity has grown 12% throughout the prior seven months. The company is indicating that the long-term prospect of its coal business is looking positive.

After it deprived of much of its energy coal production, it has enhanced its performance for coking coal, which is primarily used in steel making. That has been a growth sector for the company, but it is seeing growth for various other markets to produce additional revenue as well as earnings. Oil prices are down again, and due to this, the company is planning to conclude several DUC wells at its Black Hawk field in Texas.

Conclusion

BHP Billiton is witnessing several strong trends and will likely head higher. The company has rallied on the back of strong iron ore prices, and will probably continue heading in the same direction. Thus, I think investors can still buy the stock as it potentially has about 10% more upside.

Moreover, the positive trend in its coal business will also be a tailwind in the short-term. Hence, I think BHP Billiton is a buy.
Published on Aug 4, 2016
By Prudent Investor

Copyrighted 2016. Content published with author's permission.

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