Investing in resources companies over the last year has been a challenging experience for investors. For example, BHP Billiton Limited (ASX: BHP) has seen its share price fall by 20%, while Oil Search Limited (ASX: OSH) has posted a decline of 23% during the same time period. And, while the outlook for commodity prices such as oil and iron ore may be somewhat negative (especially in the short run), now could be a great time to increase your exposure to the space and, in particular, to BHP and Oil Search.
Bright Outlook
While lower commodity prices will inevitably impact on the top and bottom lines of companies such as BHP and Oil Search, they are implementing strategies that are set to add value for their shareholders. For example, BHP has spun-off its non-core assets and this looks set to allow the smaller, more focused BHP to become more efficient, leaner and more competitive versus its rivals. As such, and while the new entity will be less diversified, it should be able to provide improved financial performance moving forward.
Similarly, Oil Search's shift towards liquefied natural gas (LNG) production via the project in Papua New Guinea should provide it with an excellent long-term growth outlook. That's because demand for LNG is set to exceed supply over the medium term and, in addition, increasing exposure to LNG could provide Oil Search with greater diversity than it has enjoyed in the past. And despite a maintenance shutdown at the PNG LNG project, Oil Search's bottom line is forecast to rise by 14% per annum over the next two years.
Income Prospects
With interest rates on the slide, BHP's yield of 4.9% (fully franked) could act as a positive catalyst on its share price. Furthermore, it is expected to increase dividends per share at an annualised rate of 17.5% during the next two years and, with its shareholder payouts having risen by 15% per annum during the last 10 years, it appears to be an income play with a great track record.
Meanwhile, Oil Search currently yields just 2.2% but has the scope to increase dividends at a brisk pace over the medium term, with a payout ratio of 47% alongside the aforementioned earnings growth forecasts indicating that its yield could move upwards.
Looking Ahead
Clearly, both BHP and Oil Search's financial performance is positively correlated to commodity prices. And, looking ahead, the outlook for the commodity sector is not particularly optimistic, which means that both companies could be in for further challenges. However, Oil Search and BHP have good track records of profit growth, with BHP's bottom line growing at an annualised rate of 8.5% during the last 10 years and Oil Search posting growth of 25% per annum during the last five years.
And, with sound strategies and clear catalysts to improve investor sentiment over the medium term, they look set to turn the tables on a disappointing year to post excellent returns.
