BHP Billiton is one of Australia’s greatest corporate success stories; having grown from humble beginnings in Melbourne, BHP is now a multinational commodities powerhouse and claims to be the world’s largest national resources company. (Annual Report, 2009 pp. B)
The BHP Billiton Petroleum sector has been the focus of big BHP investment dollars of late as the company looks to expand their operations. BHP-B Petroleum produced over 376,000 barrels of oil per day in 2009 and has maintained an impressive 9% annual growth rate since 2007. (Petroleum Annual Review, 2009 pp 5)
BHP Petroleum operates in many countries across the world and is currently ...view middle of the document...
The group investment strategy of investing primarily in ‘long-life, low-cost, expandable, export-oriented, tier one assets’ (BHP Annual Report, 2009 pp 6) was a major factor in the company being able to weather the adverse financial conditions. Tier one assets/capital were established by the Basel committee to set a standard for banks (and other entities) of their minimum capital adequacy requirements (Viney, 2009. pp 66). BHP management have obviously identified this as a precedent that would be valuable to follow in their company and have used it to good effect. Tier one assets include ordinary shares, general reserves, retained earnings, foreign currency translation reserve etc and are considered the highest quality capital. Tier 1 assets have many beneficial characteristics, including:
• They provide a permanent and unrestricted commitment of funds
• They are freely available to absorb losses
• They do not impose any unavoidable servicing charge against earnings
• They rank behind claims of depositors and other creditors in the event of winding-up.
(Viney, 2009. pp 66)
In addition to the security of their flexible Tier 1 assets, BHP – through their financial planning and management controls – have also sought to maintain a solid ‘A’ credit rating as an added degree of collateral. The better the credit rating of a company, the more attractive a loan prospect the company becomes and the more likely it is to have loan applications approved. (Viney, 2009 pp 67)
Both these measures allowed BHP to maintain a relatively sound balance sheet in the face of a downturn in the demand for commodities, and will allow the company to take full advantage of the recovery of the industry and indeed the economy.
One of the main reasons BHP was able to emerge from the global financial crisis relatively unscathed was the growth of countries that have a high commodity demand; namely China. The economist credited with initially predicting the financial crisis, Nouriel Roubini, stated recently that the main factor in the recovery of the Australian economy – particularly the mining sector – is the continued growth of China, Australia’s largest commodities customer. (Hayes, 2009) In 2009 alone, while the world economy is still in recession, China’s GDP grew by 8.7% - the 4th highest growth of any country. This during a period where the so-called powerhouse economies – Japan (-5.3%) , The UK (-4.8% ) and the US (-2.4%) – struggled to operate efficiently. (Australia recorded a 1% growth over this period)
(World Factbook, 2010)
In doing business with China or indeed any foreign economy, BHP management would have to employ foreign exchange risk management processes in order to realise fully the risks associated with trading in foreign currency. The assets, earnings and cash flows of BHP are all influenced by the wide range of currencies in which...