BHP Group (NYSE:BHP) BHP recently announced the signing of an agreement with Hess Corporation (NYSE:HES) to acquire the latter’s 28% interest in Shenzi oil and gas field located in the Gulf of Mexico for $505 million. This move is in sync with the company’s plans to augment its petroleum portfolio through targeted acquisitions in high-quality deepwater assets and the continued de-risking of growth options.
Currently, Shenzi is structured as a joint ownership with BHP being the operator with a 44% interest, Hess holding 28% and Spain’s Repsol (OTC:REPYY) S.A. the remaining 28%. Following the completion of the deal, expected by the end of December, BHP Group’s stake will go up to 72% and add approximately 11,000 barrels of oil equivalent per day to production (90% oil).
The Shenzi facility is located approximately 120 miles (195 kilometres) off the Louisiana coastline and is installed in approximately 4,300 feet (1,300 metres) of water on Green Canyon Block 653, making it the second deepest tension leg platform (TLP) in the world. The overall field comprises four blocks: Green Canyon 609, 610, 653 and 654.
Notably, the Shenzi project accounted for 7% of the Petroleum Group’s revenues in fiscal 2020. With the completion of the current deal, this proportion will go up in the future. For fiscal 2020, BHP Group’s underlying attributable profit from continuing operations was $9.06 billion in fiscal 2020, down 4% from $9.47 billion in fiscal 2019 as gains from favorable exchange rate movements, improved productivity and lower unit costs were offset by reduced commodity prices and volumes.
Despite the volatility in oil prices this year, the company believes that the fundamentals of oil and advantaged gas will remain strong over the next decade and beyond. While demand will continue to rise, the industry is subject to a decline rates of at least 3% per annum in supply. So, with the expected demand-supply gap through at least the mid-2030s, considerable investment in oil is required to fill that gap. The company believes deepwater assets will most likely be a reliable supply source in the longer term. BHP Group continues to target counter-cyclical acquisitions in high-quality producing or near-producing assets. As the operator and increased interest in this tier one asset, the company will now have more opportunity to grow Shenzi high-margin barrels and value.
At the end of fiscal 2020, BHP Group had six major projects under development in petroleum, copper, iron ore and potash, with a combined budget of $11.4 billion over the life of the projects. First production from Atlantis Phase 3 was achieved in July 2020. The Spence Growth Option and South Flank are expected to deliver first production within the next 12 months.
In fiscal 2021, BHP Group expects to produce between 244 and 253 Mt of iron ore compared with 248 Mt produced in fiscal 2020. The company’s petroleum production guidance for fiscal 2021 is pinned at the range of 95-102 MMboe. The company anticipates copper production between 1,480 kt and 1,645 kt for fiscal 2021, indicating a decline of 5-14% from production in fiscal 2020. While production guidance of Metallurgical coal for fiscal 2020 is anticipated between 40 and 44 Mt, the same for energy coal is expected in the band of 22-24 Mt. Nickel production for fiscal 2021 is now expected between 85 kt and 95 kt, which calls for an improvement of 6-19% from fiscal 2020 production levels.
Conventional Petroleum unit cost is projected at $11-$12 per barrels of oil equivalent (boe) for fiscal 2021, suggesting a rise of 13-23% over fiscal 2020. Escondida unit cost is projected at $1.00-$1.25 per pound, indicating a range of decline of 1% to growth of 24% over fiscal 2020. Queensland Coal unit cost for the fiscal is expected at $69-$75 per ton, calling for 2-11% growth over fiscal 2019. WAIO unit cost guidance is pegged at $13-$14 per ton, indicating a year-over-year increase of 3-11%.
The company expects most major economies to contract in 2020, barring China. BHP Group’s strong cash flow and focus on lowering debt will help it sail through these turbulent times. The recent surge in iron prices also bodes well.
BHP’s shares have gained 6.4% over the past year compared with the industry’s growth of 21.7%.
Zacks Rank & Other Key Picks
BHP Group currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
A few other top-ranked stocks in the basic materials space include Agnico Eagle (NYSE:AEM) Mines Limited AEM, Newmont Corporation NEM and DAQO New Energy Corp. DQ, each carrying a Zacks Rank #1.
Agnico Eagle Mines has an expected earnings growth rate of 92.1% for 2020. The company’s shares have surged 42% in the past year.
Newmont has an expected earnings growth rate of 88.8% for the current fiscal year. Its shares have returned 56% in the past year.
DAQO New Energy has an expected earnings growth rate of 374% for 2020. The company’s shares have soared 293% in the past year.
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