Please ensure Javascript is enabled for purposes of website accessibility

Oil Hits a Fresh Low, Taking BHP Billiton With It

By Alex Dumortier, CFA - Jan 15, 2016 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

BHP Billiton takes a $7.2 billion hit on its U.S. oil and gas assets, resulting in more pain for its investors.

U.S. stocks are lower in early afternoon trading on Friday, with the Dow Jones Industrial Average (^DJI 1.27%) and the S&P 500 (^GSPC 1.73%) down 1.85% and 2.99%, respectively, at 12:20 p.m. EST. Those figures mean the U.S. stock market will likely add another losing week to the worst start to a year in decades. BHP Billiton Limited's shareholders are taking a bath today, with the New York-listed American Depositary Receipts down 8.21%.

The drop in BHP Billion's shares follow the miner's announcement that it expects to take a $4.9 billion post-tax ($7.2 billion, pre-tax) impairment charge on onshore U.S. oil and gas assets. The charge is the result of a bi-annual review of the company's assets in an environment in which the price of oil has continued to fall.

Oil has lost roughly a fifth of its value in 2016, with U.S. crude oil futures for delivery in February falling below $30 on Friday to a fresh 12-year low.

Four months ago to the day, on Sept. 15, upon learning that fund manager BlackRock had all but exited a 10.1% position in BHP Billiton, this column posited that "[w]e may not have reached the low in miners' stock prices, but they look cheap enough to begin buying, albeit selectively. BHP Billiton is a great candidate -- I'd rather take the other side of BlackRock's trade."

At that time, the shares were down nearly two-thirds (-64.6%) relative to their April 2011 high. This is what happened next (the blue line tracks BHP Billiton's performance):

BHP Chart

BHP data by YCharts.


In my defense, I didn't say the shares couldn't go lower (I'm the first one to say I have no idea how to pick a bottom). Nevertheless, if the old adage that there is no difference between being early and being wrong is true, then I was very early.

Can the shares continue to drop? Of course! One possible catalyst is a cut or suspension in the dividend, although with the London-listed shares yielding over 14%, the going assumption must be that the market has already discounted that eventuality (for the record, I think this is bound to occur).

However, none of this tells us much of anything about where the shares will be five or 10 years from now. And speaking of a longer time horizon...

In an another corner of the energy sector, billionaire investor Warren Buffett continues to add to Berkshire Hathaway's giant position in Phillips 66. He has now bought shares for seven days consecutively. As this column pointed out on Tuesday, you can currently get into the stock at a cost basis below Berkshire's.

The bloodletting in commodities markets is creating opportunity for patient capital, but those investors who will reap the greatest rewards will follow their North star: an assessment of business quality and intrinsic value. Furthermore, they must be willing to walk through the fire of volatility on the way to those rewards.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,761.05 (1.27%) $424.38
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,280.15 (1.73%) $72.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.