BHP Billiton (BHP, Financial) produces a major portion of its net income from oil production. For instance, in 2015, the company generated $126 million from its petroleum business while the total income for the period was $199 million. It isn’t really a surprise to see the stock rally strongly this year as oil prices have jumped almost 100% from hitting multiyear lows of around $26 per barrel.
On the other hand, it should be noted that the company’s management's high efficiency in exploiting stockholder value can moderately be described by the effective separation of minor assets. A demerger of BHP Billiton took place a year ago, and a company –Â South32Â –Â was introduced, which absorbed several minor company assets.
The demerger was the initial step to fortify the company’s balance sheet and help monetize nonessential assets. But nothing went in the right direction, as earlier this year the company was left with very low cash and could not withstand dividend payments. As a result, the company decided to reduce its dividends by 75%.
Unmanageable debt?
Samarco is a joint venture between BHP Billiton and Vale, and the Samarco disaster has massively affected both the companies. Forget the dividend cut; stockholders are currently worried about the company’s ability to meet interest and principal repayments. At present, BHP’s long-term debt is approximately $32.5 billion.
Furthermore, BHP Billiton formerly has a $750 million maturity on Nov. 21, with the overall amount unpaid. This alone is the most significant concern this year, other than the company’s semiannual interest payments totaling to $374 million. Therefore, an additional $1.02 billion will be needed this year to pay short-term debt.
BHP Billiton presently has $10.6 billion in cash assets. Moreover, the company has $85.4 billion value of PP&E that it could divest should the need arise. Most significantly, the company has been reporting a negative net income for the past two quarters, at -$2.35 billion and -$5.67 billion, and a major portion of the cash flow from operations previous year has produced from D&A being added back. But the fact that BHP may have to sell assets to pay off just the interest paints a grim picture of the company’s future.
Conclusion
BHP Billiton has rallied along with crude oil, but the company’s rally looks unsustainable. With the company heavily in debt and struggling to pay the interest expense, BHP Billiton’s future does not look good. Hence, I reckon investors should look to sell the stock.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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