The good, bad and uncertain of BHP Billiton

The weakness in the oil market has taken its toll on shares of leading natural resources company BHP Billiton (BHP). This company’s stock downward spiral in recent months could continue as some analysts estimate oil prices could fall further to $40. But for oil investors, who think that oil could see a recovery over the long howl and have patience, may consider BHP Billiton. Before you dive into this stock, however, you should be aware of its strong points and weak points. Let’s break them down to BHP Billiton’s the good, the bad and the uncertain.

The good — high dividend yield, continues to grow

The company continues to expand its operations and in 2014 its petroleum output is estimated to have expanded by 5%, year on year. This growth comes from its U.S. operations including in Atlantis oil field in the Gulf of Mexico and Onshore U.S. In the third quarter alone, the company recorded a 38% jump in its Atlantis production after completing two production wells back in June of this year. Its Onshore U.S. production spiked by 49% in the third quarter of 2014. If the company keeps growing its business in such a manner, this could offset some of the adverse effect of falling oil price has on its revenue.

Let’s not forget that the company also pays a heft dividend payment of 66 cents per share per quarter. This comes to an annual yield of 4.8%. Also, the company has relatively low debt burden (0.43 debt-to-equity ratio), solid cash flow from its operations and more than reasonable liquidity.  These measures also vote well for its stability and durability in times of uncertainty.

The bad — keep expanding its copper operations

According to a recent report, BHP Billiton and Rio Tinto (RIO) have gathered huge copper holdings. The companies are also expected to keep producing more copper in the coming years even though the Australia’s Bureau of Resource and Energy Economics estimates a surplus in supply in 2015. Further, the World Bank expects copper prices to fall in the coming years. These turn of events don’t vote well for BHP Billiton’s decision to keep moving into copper and could reduce its profit margins.

The uncertain — oil and iron ore

This will be the main question mark for BHP Billiton – will oil prices bounce back in the coming quarters. The growing supply mainly in North America from shale oil and the expected lower growth rate in the demand for oil keeps pressuring down oil prices. But this could all change if the demand starts to pick up again or OPEC changes its oil quota. It seems that over the mid-term the risk is a bit skewed – the potential rise in oil may be actually higher than another downfall in oil prices. Basically, a lot could go that will bring oil back up to cross back to the mid 70s than there are to keep oil down at 40s or even lower for a long time.

The same goes for iron ore: prices have fallen in the past year, because China, the world’s largest importer of iron ore, keeps growing at a slower pace and imports less iron ore. BHP Billiton keeps expanding its iron ore operations and last year alone, the company estimated to expand its iron ore production by 11%, year on year.

Nonetheless, the World Bank projects iron ore prices to slowly rally in the following years. So even though prices aren’t expected to reach their high levels from previous years, they are still estimated to move back up. This could translate to a rise in profitability for BHP Billiton.

Bottom line

The main problem that BHP Billiton faces is falling commodities prices that continue to weigh in on its stock. But if you think that mainly oil but also iron ore and copper are likely to make a comeback, BHP Billiton could offer an investment opportunity. Until the company recovers you could enjoy its sizable dividend pay and growth in operations.

Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.