NEW YORK (TheStreet) -- BHP Billiton (BHP), the world's largest natural resources company, is transforming itself into more of an oil and natural gas company like Exxon Mobil (XOM) and Chevron (CVX). While BHP is well below the production levels of a Chevron or Exxon, it is a welcome change for investors. Here are three reasons why investors should seek to profit from BHP focusing more on oil.
There will be a greater demand for oil and natural gas in the future.
BHP is selling off industrial metals assets to focus on key sectors such as oil and natural gas. Towards that goal, it sold off or spun off its aluminum, bauxite, and nickel assets.
Its major move in oil and natural gas was the $15 billion purchase of Petrohawk Energy. BHP also spent $4.75 billion buying interests in the Fayetteville Shale from Chesapeake Energy (CHK). This $20 billion expenditure puts BPH in a better position to profit from the increasing demand for oil and natural gas, which is expected to supply 60% of the world's energy needs for the future according to Exxon's, The Outlook for Energy: A View to 2040.
READ MORE: 4 Stocks Warren Buffett Is Selling in 2014
Oil is becoming a safe haven holding, raising the value of sector assets.
Oil is evolving into a new safe haven asset. That resulted from liquidity, demand and its appeal to both speculators and investors. From that, the price of oil trades higher than it would based on pure economic demand. In testimony before Congress, Exxon CEO Rex Tillerson stated that oil was 50% higher due to speculative buying. With substantial oil and natural gas holdings, BHP benefits from the higher price for those assets.
READ MORE: 8 Stocks George Soros Is Buying in 2014
This reduces BHP's reliance on the China market.
As an industrial mineral company, BHP was very reliant on demand from China. As the world's biggest consumer of aluminum, bauxite and other commodities, Chinese growth very much influenced the stock price of BHP and others in the natural resources sector. Reconfiguring itself to be more of a player in oil and natural gas, BHP is not as heavily reliant on China as it was before.
This should also make BHP stock more stable.
At present, the beta for BHP is 1.60. Exxon is 0.86. Chevron is 1.09. Stability such as that increases the appeal of a stock as it evinces there are long term investors who are committed to holding their shares. A major factor for the long term appeal of Big Oil stocks is a big dividend: BHP certainly has that with a yield of 3.35%, topping Exxon's 2.81% .
BHP now produces about 670,000 barrels of oil equivalent daily.
It is seeking to double its oil production just in the Eagle Ford in Texas alone. This is a very attractive transformation in BHP, even though it has a long way to go before it comes close to an ExxonMobil or a Chevron in output. As its oil production increases, though, so will the long term value of BPH for investors.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
READ MORE: 10 Stocks Carl Icahn Loves in 2014
TheStreet Ratings team rates CHEVRON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate CHEVRON CORP (CVX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- CVX's revenue growth has slightly outpaced the industry average of 1.0%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- CVX's debt-to-equity ratio is very low at 0.15 and is currently below that of the industry average, implying that there has been very successful management of debt levels.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry average. The net income increased by 5.6% when compared to the same quarter one year prior, going from $5,365.00 million to $5,665.00 million.
- In its most recent trading session, CVX has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- You can view the full analysis from the report here: CVX Ratings Report