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BHP Billiton faces challenging 2019, says Deutsche Bank as it cuts rating to ‘sell’

Deutsche Bank expects BHP Billiton's earnings and cash flows to weaken in 2019
BHP
Deutsche Bank thinks the oil and gas arm needs further investment in the years ahead

The outlook for BHP Billiton Ltd (LON:BHP) in 2019 is likely to be more challenging this year, Deutsche Bank said as it downgraded its rating on the stock to ‘sell’ from ‘hold’.

The investment bank expects BHP’s earnings and cash flows to weaken in 2019 as steel raw material prices fall on a slowdown in China demand.

READ: BHP Billiton cuts full year copper production guidance after plant outages hurt volumes

It also expects” lagging growth and upside risk” to medium term capital expenditure.

“As sector earnings and cash flows fade in 2019/20 we expect investors to increasingly focus on growth and capital allocation in the years ahead,” Deutsche Bank said.

“BHP screens poorly on growth over the next 3-5 years and we expect FY21+ capex to lift above the company's current ceiling of $8bn pa for FY19/20.”

BHP plans to return US$10.4bn to shareholders but after this Deutsche Bank sees stronger cash flow and cash returns at peers Rio Tinto PLC (LON:RIO) and Glencore PLC (LON:GLEN).

BHP moves from simplification to expansion 

BHP has decided to exit US onshore as part of a plan to simplify its operations.

“While there are still some smaller assets in the portfolio that could be divested (Nickel West, selective and oil/gas and thermal coal assets) BHP's strategy is pivoting from one of simplification to more growth focused,” Deutsche Bank said.

Deutsche Bank thinks final phase expansions in iron ore and coking coal will keep volumes ticking higher in 2019/20 but after this, the company will be faced with ongoing production decline in oil and gas, a longer-term grade decline in copper and flat iron ore as well as a decrease in coking coal volumes.

Oil and gas division needs investment, says Deutsche Bank

The bank noted that BHP remains committed to the conventional oil and gas portfolio, which has been in near terminal volume decline since the 2010 financial year.

“This division will require a material step up in investment in the years ahead to stabilise and grow volumes.“

“At this stage, details on the oil/gas projects are very limited making valuation judgements difficult. The low return Jansen potash project also remains a key longer term growth option.”

Deutsche Bank has cut its earnings (EBITDA) estimates for 2019-21 by an average of 4% due to lower forecasts for copper and oil, partly offset by higher coking coal prices.

In mid-morning trading, shares in BHP were little changed at 1,686p.



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