Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.
Today I’m looking at BHP Billiton plc (LSE: BLT) (NYSE: BBL.US) to ascertain if it can make £15 billion in profit.
Have we been here before?
A great place to start assessing whether or not BHP can make £15 billion in profit is to look at the company’s historic performance. It would appear that BHP made £14.8 billion during 2011, one of the mining industry’s best years on record.
However, since 2011 BHP’s profits have more than halved as the commodity boom has come to an end. What’s more, BHP’s high levels of capital spending and rising costs within the mining industry in general, have also weighed on BHP’s profitability.
But what about the future?
Unfortunately, as a resource company BHP has very little control over its own future, as profits are reliant upon commodity prices and the state of the global economy and. Nevertheless, BHP is working hard to drive profits higher by reducing its dependence upon cyclical commodities such as iron ore and coal, while expanding into the relatively defensive oil business.
Indeed, BHP is currently spending $4 billion a year to increase production from its shale oil properties within the United States. It is estimated that when these assets are in full production they will generate a cash flow of $3 billion a year for the company.
Additionally, BHP is ramping up its production of iron ore to offset the sliding price of the commodity. In particular, during the three months to December of last year, BHP’s iron ore production jumped 16% and the company’s production of metallurgical coal, which is used in steelmaking, also hit record levels.
Further, BHP is achieving these record levels of production while cutting capital spending. Specifically, BHP’s capital spending budget it expected to be $16 billion for 2014, down from $22 billion last year and nearly $30 billion during 2012.
On a another note, it is likely that over the next few years BHP will benefit from recently introduced regulations within China, designed to reduce smog in the country.
You see, due to these regulations, Chinese steel makers a buying a higher quality iron ore known as ‘lump’. Lump can be placed straight into blast furnaces and does not need sintering, a dirty polluting process, in order to be used in the production of steel. This has created some-what of a mini-bubble in the lump market with prices doubling during the past few months. And this is great news for BHP as the company is one of the worlds leading suppliers of lump.
Foolish summary
So overall, BHP’s record levels of production, the company’s move into the defensive oil business and reduction in capital spending should help drive profits higher in the long-term.
All in all, I feel that BHP can make £15 billion profit.