Highlights of the Month of February 2015

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the month February, 2015:

  • Earnings report of BHP Billiton and RIO Tinto
  • Oil prices rebound in February 2015.
  • USA Q4-2014 GDP Growth revised down to 2.2 percent.

EARNING REPORT BHP BILLITON & RIO TINTO:
Rio Tinto Group (RIO.AX) and BHP Billiton (BHP.AX) are both British-Australian multinational metals and mining corporation with their respective headquarters in London, United Kingdom, and Melbourne, Australia.

BHP Billiton and RIO Tinto with their respective market capitalization of 139 and 92 Billion US-Dollars are worlds biggest and second biggest mining company.

RIO TINTO financial results February 12, 2015.

Highlights:

  • Consolidated sales revenues of US$47.7 billion.
  • EBITDA margin at 39 percent, unchanged from 2013.
  • Achieved underlying earnings of US$9.3 billion, nine percent lower than 2013 despite the US$4.1 billion (post-tax) impact of lower prices.
  • Generated net cash from operating activities of US$14.3 billion,
  • Decreased net debt by US$5.6 billion in 2014 to US$12.5 billion on 31 December 2014.
  • Board of directors declared cash dividend of US$ 1.98,  – an increase of 12% – payable on April 9th 2015, for shareholders on record on March 6, 2015.

Source:

BHP Billiton financial results February 24, 2015.

  • Underlying EBITDA of US$14.5 billion, down 12%.
  • Underlying attributable profit of US$5.4 billion, down 31%.
  • Net operating cash flow of US$10.4 billion, down 12%.
  • Capital and exploration expenditure of US$6.4 billion, down 23%.
  • Free cash flow of US$4.1 billion, up 21%.
  • Net debt down to US$24.9 billion.
  • Board of directors declared a cash dividend of US$ 0.62,- an increase of 5% – payable on March 31st 2015, for shareholders on record on March 13, 2015.

Source: 

CRUDE OIL PRICES ROSE SHARPLY IN FEBRUARY:
After posting declines over the past seven months, crude-oil futures rebounded sharply in February, with Brent crude scoring its biggest monthly percentage climb in nearly six years, supported by an improving demand outlook and supply outages.

On its way to contract expiration, in March New York ultra-low sulfur diesel (ULSD) gained more than 7 percent in volatile trading, and the 36 percent February increase was the biggest percentage monthly rise in 15 years.

Brent crude LCOc1 rose US$2.53 to US$62.58 a barrel. February’s 18 percent gain was the biggest monthly percentage rise since May 2009.

The premium of Brent crude to Nymex WTI crude remains wide at more than US$12 a barrel, its widest in more than a year.

The widening of the price gap in part reflects the fact that the U.S. oil output has continued to grow relentlessly despite the much weaker prices recently.

As can be seen from below chart WTI crude oil is stuck in a $10 trading range between $45 and $55 per barrel as it continues to cross above and below the heavily-watched $50 psychological level.

A decisive break above or below this trading range is necessary to confirm WTI crude oil’s next directional move.

USA Q4-2014 GDP GROWTH REVISED DOWN TO 2.2 PERCENT:
The Commerce Department said Friday, February 27, that the economy as measured by the gross domestic product grew at an annual rate of 2.2 percent in the October-December quarter, weaker than the 2.6 percent first estimated last month.

The USA Bureau of Economic Administration (BEA) revised the entire data series as follows:

  • Personal Consumption was 2.83% of the final GDP, down from 2.87%.
  • Fixed Investment was 0.71%, vs 0.37% before.
  • Net trade subtracted even more from growth, with Net Exports less Imports amounting to -1.16%, down from -1.02%.
  • Government offset the decline modestly, subtracting -0.32% from growth, compared to -0.40% in the first revision.

Below chart gives an impression of the USA GDP growth since Q1-2011 and a breakdown of the estimated and revised Q4-2014 GDP Growth.

PGM CAPITAL COMMENTS:

BHP Billiton & Rio Tinto earnings report:
The earnings report of both BHP Billiton as well as the one of Rio Tinto prove that we are currently living in an era of commodity demand slump. On the other hand it also proves that the vision and quality of management of both Rio Tinto as well as BHP Billiton, have made it possible for both companies to produce enough cash flow, which made it possible for both companies to increase their dividend to their share holders.

Based on the closing price of RIO Tinto and BHP Billiton of respectively; US$ 49.30 and US$ 52.52 a share, of Friday, February 27th, their shares currently have a dividend yield of respectively 4.90 % and 4.70%.

Based on both companies’ fundamentals, balance sheet and dividend yield we currently have a BUY rating on the stocks of RIO TINTO and BHP BILLITON.

Crude Oil Price breaking 7 month losing streak in February:
Right now the oil market is totally focused on finding a bottom for oil prices. However, according to OPEC’s Secretary-General Abdulla al-Badri we’ve already hit bottom.

opec-secretary-general-abdalla-salem-el-badri_18

OPEC Secretary General -Abdallah Salem el-Badri-

Not only that, but he sees a real possibility that oil prices could explode higher to upwards of US$200 per barrel in the future.

According to recent comments by the Secretary-General when he was in London, the oil market doesn’t need to look for oil prices to bottom as the market has already bottomed. Instead, he offered quite bullish comments by saying,

“Now the prices are around $45-$55, and I think maybe they [have] reached the bottom and we [will] see some rebound very soon.”

Another sign that oil prices might have bottomed is the fact that rig count in the U.S. is plunging.

The Secretary-General also said that, when it comes to future oil prices

“if you don’t invest in oil and gas, you will see crude oil price of more than US$200.00 a barrel”

This is because oil production naturally declines and oil companies need to invest in new production to not only replace this decline in production from legacy oil fields but to add new production to meet growing demand. However, oil companies are reluctant to invest in new production as their cash flows decline.

Over time this could become a problem as oil fields around the world naturally decline by an average of about 5% per year as can be seen from below chart.

We believe that the current situation with oil prices which has hurt the stocks as well as those of Oil producing and Oil servicing companies, can be seen as a unique opportunity for long term investors, to add high quality stocks in this sector to their portfolio against bargain prices.

USA Q4-2014 GDP revised down:
The main reason for the revision: a substantial drop in growth contribution from private inventories, which instead of adding 0.82% to the bottom GDP line, only contributed 0.12% in Q4 following the first revision.

As can be seen from below chart the revised Q4-2014 GDP growth of 2.18%, was the lowest economic growth rate since the “polar vortex.” of Q1-2014.

Regarding the fixed investment component of the GDP we are sure that this number will plunge in Q1-2015 as a result of the shale capex halt.

Below chart shows the slowing growth rate of the US economy year-over-year since 2010.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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