BHP Billiton cash flows hold firm

This was a solid performance, and would have resulted in an increase in the bottom line were it not for a re-measurement of deferred US taxes, and the associated $2.3bn charge. Looking ahead, and providing you accept BHP’s contention – that there is a “constructive outlook” for iron ore, coal, oil and copper – then the broader investment case looks quite strong.

Assume prices stay at 2017 levels, and productivity improvements (including savings of $1bn this year) promise a 20 per cent return on capital by 2022. Assume commodity prices sink, and the group is still “rich” in organic opportunities to which it can direct its $8bn annual capital budget.

But at this stage in the cycle, the battle is to ensure efficiency drives aren’t perpetually offset by cost inflation. BHP expects overheads at its Western Australia iron ore division to fall slightly this year, although lower copper grades at Escondida in Chile, higher strip ratios at its Queensland coal business and natural field decline within the conventional petroleum division mean that group-wide unit costs are likely to rise between now and June 2019.

At least BHP is free of one particularly thorny cost base, following the sale of its US onshore assets. The shale portfolio was the only major group subsidiary that proved an inefficient (and lossmaking) use of capital last year; without it, BHP’s return on capital employed would have risen from 14 per cent to 18 per cent.

On average, analysts expect adjusted pre-tax profits of $14.7bn and EPS of $1.71 for the current year, flat on estimates of $14.5bn and $1.72 for the 12 months to June 2018.