BHP (ASX:BHP) share price sinks 7% despite strong profit growth
The BHP Group Ltd (ASX: BHP) share price is under significant pressure on Wednesday following the release of its full year results.
In early trade, the mining giant’s shares are down 7% to $47.80.
What happened in FY 2021?
For the 12 months ended 30 June, strong iron ore prices underpinned a 69% increase in underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to US$37,379 million. This was in line with the market’s expectations.
BHP’s strong operating earnings growth ultimately led to record free cash flow of US$19.4 billion. This allowed the BHP board to increase its dividend by 151% to US$3.01 per share. This comprises a record final dividend of US$2.00 per share and an interim dividend of US$1.01 per share. The former was ahead of the analyst consensus dividend estimate for the second half.
In addition to its earnings and dividend, the company revealed that it would be merging its oil and gas operations with Woodside Petroleum Limited (ASX: WPL). The deal will see BHP’s oil and gas business merge with Woodside. After which, Woodside will issue new shares that will be distributed to BHP shareholders.
Given that its earnings were in line and its dividend was ahead of the market’s expectations, investors may be wondering why the BHP share price is tumbling lower today.
Why is the BHP share price tumbling lower?
Today’s weakness in the BHP share price appears to have been driven by a mixed reaction to its results and merger plans.
This morning, analysts at Morgans have retained their hold rating and lifted their price target slightly to $45.90. This compares to the current BHP share price of $47.80.
Morgans notes that the Woodside merger removes growth opportunities for BHP. Though, it acknowledges that its balance sheet strength gives it mergers and acquisitions (M&A) optionality.
It said: “BHP has agreed to merge its Petroleum business with Woodside (WPL), with the two sides agreeing to the merged entity being a 52/48 WPL/BHP Petroleum split. Ultimately this is a call on where ESG pressures are headed, with BHP siding with the view that it was better off jettisoning its oil & gas assets near-valuation in order to boost its ESG profile and preserve its long-term cost of capital.”
Based on both the BHP share price and Woodside share price at the time of announcement, Morgans estimates that the deal values BHP Petroleum at US$13.8 billion. This is a 5% discount to its US$14.5 billion valuation.
“The downside of divesting petroleum is the loss of high-margin oil & gas earnings and growth projects that represent 2/3 of BHP’s total growth profile. Management attempted to answer analyst questions on the concentration of BHP earnings and material reduction in its growth profile, by pointing to its intent to push its existing assets harder (“innovation”), participate in more exploration, early-stage asset entry and yes…M&A,” the broker added.
Despite today’s weakness, the BHP share price is still up a sizeable 22% over the last 12 months.
Why is the BHP share price sliding lower?
Shares in mining giant BHP have climbed 28% in the last 12 months.
Shares in the world’s biggest miner BHP (ASX: BHP) are among the biggest losers on the ASX boards on Wednesday. Shares in the company were down 5.5% at $48.52 at the time of writing.
What is weighing down the BHP stock price?
BHP shares have dropped after the mining giant late on Tuesday announced a historic deal under which it would divest its entire petroleum business to Woodside Petroleum (ASX: WPL) in return for the latter’s shares.
The deal will catapult the expanded Woodside into the top 10 producers in the world and consolidate Australia’s energy sector.
BHP shareholders will own 48% of Woodside as part of the deal which values BHP Petroleum at US$13.9 billion.
BHP CEO Mike Henry also announced a major shift in BHP’s structure, with the company to abandon its dual-listed structure that had been in place since its merger with Billiton in 2001. It will retain its ASX listing.
Analysts had been expecting the decisions to put pressure on the BHP stock to account for the divestment of the petroleum business and the loss of arbitrage in the dual-listed shares.
Strong results
Meanwhile, news of BHP’s best profit in nearly a decade has understandably been relegated to second spot.
The world’s biggest miner posted an underlying profit of $17.08 billion for the 12 months to 30 June, an 88% surge over the previous year, on the back of booming commodities prices.
BHP’s iron ore division again dominated its results, with underlying earnings before interest and tax of US$24.29 billion, or about 80% of its total underlying earnings of US$30.29 billion.
The miner will pay $2 per share as a final dividend, totalling $10.1 billion, and bringing the total payout for the year to $3.01 a share.
But the strong run could be coming to an end, as iron ore prices have slid nearly a third in the last few weeks over concerns of a resurgence of COVID-19 cases in China and its decision to lower emissions by curbing steel output.
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