Royal Bank of Canada has turned more positive on BHP Group PLC (LON:BHP), upgrading its rating to 'outperform' from 'sector perform' on valuation factors after recent underperformance, with its enthusiasm also having grown following in-depth analysis of the firm's Petroleum business.
In a note to clients, RBC's analysts pointed out that BHP’s Petroleum division has suffered from the misadventure in US onshore business, albeit having exited at a very good price.
However, they noted that three offshore projects under construction (Atlantis 3, Ruby, and Mad Dog II) should substantially increase production over the next three years.
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"We’ve analysed consensus oil production and believe it is too low by 15% through FY23E. More importantly, BHP has spent c.$2.8bn on oil exploration since 2015, which has seen significant success especially around the large Trion discovery in Mexico and the Northern Gas play in Trinidad.." the analysts said.
Adding: "In front of the Petroleum capital markets day on November 11, we have assessed the growth potential from this exploration success, modelled Trion, and together with the above projects we now forecast a 58% increase in Petroleum EBITDA to $5.1bn through 2025 (vs. cons $3.1bn)."
The RBC analysts said their analysis gives them confidence that the Petroleum division is now returning to growth and this should provide added differentiation for BHP within the wider, iron-ore-heavy diversified mining sector.
They pointed out: "BHP’s commodity mix, with a growing copper division, a soon-to-be growing again Petroleum division, and less concentration in iron ore, is more compelling, in our view, than most peers."
The analysts also noted that group production will also see less concentration in iron ore balanced by an increasing copper output, although the bank remained cautious over potential disappointment from 2020 metal demand growth in China.
They said BHP shaves have also underperformed the major local peers over the last six months. so with Petroleum providing a potential near-term catalyst, as well as recent
underperformance and valuation support they upgrade BHP shares to outperform.