What to expect from the BHP s quarterly production report

BHP is set to report its December quarterly numbers tomorrow Wednesday 23 January before the market opens in London (late afternoon Sydney time). The best way to answer the question of what to expect from the report is to outline what NOT to expect.

With that in mind, don’t expect the four following things:

* Any sudden shock to the underlying business model which is very much around the petroleum division improving and the iron ore business expanding.

* Any large decrease in production numbers of key earnings contributing divisions.

* Any large, bold spending plans or risky acquisitions.

* Any changes to management, unlike Rio Tinto last week.

BHP is now in a period of rebuilding trust with the market following aggressive acquisitions in 2011 and Chairman, Jac Nasser, knows very well the importance of well planned corporate governance. There is pressure building on Marius Kloppers to be succeeded, but no rash decision is likely.

What numbers will the market like?

Consensus is that the numbers for BHP in 2013 are for net earnings in the order of around US$14.3m or US$2.66 per share. On today’s closing price, that implies a price to earnings ratio (adjusted for currency) of around 14.5 times which is not exactly cheap. The US$2.66 in earnings compares with the US$3.91 record achieved in 2011. We measure BHP’s shareprice in A$ for convenience purposes and make the following points.

• If we assume BHP can hit A$3 per share, that means today’s A$ price is closer to a fairly valued 12 times. At A$40 a share and A$3 in earnings, BHP would be trading on an undemanding price to earnings ratio slightly above 13 times.
• The two key numbers from the report will be the petroleum and bulk commodity production groups. Given current spot commodity prices for oil, US natural gas and iron ore, we think the market will start to shift from US$2.66 per share in consensus upwards if BHP tomorrow can report within the following range.

* Total petroleum products in the order of 60 -62 million barrels of oil equivalent

* West Australian Iron ore production in the order of 42-42.5 million tonnes