Wednesday, May 28, 2008

Where Does BHP Make Its Money?

Today the price of oil is falling and though the U.S. stockmarket rose overnight the Australian stock market is down. Resource stocks are, of course, very important in the Australian market but while some resource companies produce oil, most need to oil to extract resources and so a fall in the price of oil reduces their costs substantially. The mining industry is very energy intensive (For example, this is why gold stocks are not up as much as the gold price over recent years). BHP is Australia's biggest company - it has a larger market capitalization than all the major banks combined (I think roughly 15% of the ASX capitalization). It is an oil producer, but how much of its profits does it derive from oil. The answer (for 2007) is of course in the company's annual report:

So 15% of revenue and 22% of profits come from petroleum. 51% of that revenue is profit - i.e. a 100% markup (and that was last year - all spot oil is priced at the cost of the most marginal source and those producers with cheap supplies make massive profits in an oil boom). So 22% of BHP's profits are increased by a rise in the price of oil but 78% are reduced. We don't know what the multipliers on each segment are though. Of course, Australia also has pure oil and gas producers like Santos and Woodside. But they are smaller. Santos has a capitalization of $11 billion and Woodside $45 billion (Commonwealth Bank is worth $56 billion). But a falling price of oil should have beneficial effects even on Australia's economy. I suppose investors are worried that other commodity prices will fall too. The materials and energy subindices are down 2.1% and 1.8% respectively as I write. Industrials, financials, and property are up. All others are down.

One thing that surprised me, is how little BHP made from "energy coal" - just $35 million.

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