Shares of BHP Billiton Limited (ASX: BHP) have jumped more than 2% this morning.
Although it's one of Australia's most widely-held businesses – and certainly one of its largest – a move of that magnitude in its share price isn't entirely uncommon. In fact, the "Big Australian's" shares have risen, or fallen, by 2% or more on 41 separate occasions so far in 2016, and 42 if you include today.
That's out of a possible 255 sessions, meaning that it has moved by that magnitude 16% of the time in 2016, or just below once per week.
Today, however, an upwards move of more than 2% may be considered somewhat strange. After the market closed on Tuesday, BHP reported what was its biggest loss since merging with Billiton Plc in 2001, and one of the greatest losses among companies in Australia's history.
One of BHP's best days in 2016
You can read more about the update here, but to summarise, it reported a loss of almost US$6.4 billion (yes, that's billion, with a 'B'!) while underlying earnings per share were just US22.8 cents.
The result was impacted by a number of factors, including impairments to its US onshore (petroleum) assets. Falling commodity prices also certainly played a role – particularly in the iron ore and petroleum division – while the tragic collapse of the Samarco dam in Brazil also wreaked havoc on BHP's bottom line (not to mention the shocking loss of life, damage to several villages and the environment).
As my colleague Mike King wrote in yesterday's update, "there was nothing pretty about the announcement".
Nevertheless, the market has clearly found something it liked about the result, pushing the shares higher. It was up 2.9% at $20.83 at the time of writing, with BHP's shares rising more than that amount on just five occasions so far in 2016.
Meanwhile, shares of Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) also rose 2% each. Those gains come even after iron ore prices fell marginally overnight to US$60.22 a tonne, according to The Metal Bulletin.
A 3.1% lift in the Brent oil price could go a way towards explaining why BHP's shares have risen so strongly today, although Santos Ltd (ASX: STO) shares are trading flat, while Woodside Petroleum Limited (ASX: WPL) shares are up a mere 0.6%.
Greener Pastures?
It seems to me that the most likely reason for BHP's shares surging higher today were comments made by CEO Andrew Mackenzie regarding the future for commodity prices.
While Mackenzie has previously expressed his concerns regarding the outlook for the various commodities affecting BHP's portfolio, he yesterday said:
"Over the past five years we have actively reshaped our portfolio, and we are confident we have the right mix of commodities, assets and opportunities to create substantial value over time. While commodity prices are expected to remain low and volatile in the short to medium term, we are confident in the long-term outlook for our commodities, particularly oil and copper."
The Australian Financial Review also quoted him as saying (my emphasis): "When we look to the medium term we expect prices to trade more or less in line … There is a strong sense that prices have stopped falling as opposed to being in freefall."
BHP Billiton will continue to trim its costs in an effort to enhance productivity and efficiencies across the group. It also noted that (assuming commodity prices maintain their recent levels) BHP could deliver more than US$7 billion of free cash flow with a forecast reduction in debt.
While investors might be excited about Mackenzie's comments, they do need to remember the risks and potential headwinds facing the commodities sector. Iron ore, for instance, is trading for around US$60 a tonne today, but analysts at Morgan Stanley have forecast a tumble back to US$40 a tonne this half, according to The AFR.
That would certainly put a dent in BHP's plans, and almost certainly its share price as well.
