DBRS Downgrades BHP Billiton Ltd. & BHP Billiton plc to “A,” Changes Trend to Negative

DBRS Limited (DBRS) has today downgraded the Issuer Rating of BHP Billiton Ltd. & BHP Billiton plc (collectively, BHP or the Company) to “A” from A (high) and changed the trend to Negative from Stable. The downgrade primarily reflects heightened business risk under the current difficult market conditions and the significant deterioration of BHP’s key credit metrics in 2015 to a level that is no longer supportive of an A (high) rating. Further, DBRS does not expect BHP’s credit metrics to materially recover in 2016 as the Company’s core products continue to face a depressed pricing environment that is not likely to recover in the near to medium term.

BHP’s business risk profile weakened materially during 2015, primarily because of increased operational risks driven by the overall difficult market conditions that were caused by a global oversupply in the Company’s core products including iron ore, copper and coal as well as oil and gas. The depressed commodity price environment resulted in substantial asset writedowns in 2015 and significantly weaker earnings and cash flows for BHP during the six months ended December 31, 2015 (H1 F2016). The Company’s cash flow before changes in assets and liabilities for H1 F2016 dropped by approximately 53% in comparison with H1 F2015. During the same period, total debt increased notably to finance BHP’s DBRS adjusted net free cash flow deficit after dividends. Based on DBRS’s calculations, the majority of the Company’s key metrics are now well below the “A” range. DBRS views credit metrics in this range as unsupportive of an A (high) rating.

However, despite the challenging market conditions, an “A” rating for BHP is supported by (1) the Company’s large number of competitive resource operations, which are among the lowest-cost producers of iron ore, copper and coal. These operations generally have large, high-quality, long-lived reserve bases with in-place production, processing and delivery assets that can competitively deliver products internationally; (2) BHP remains the world’s-largest mining company in terms of scale of operations, market capitalization and total assets, which gives it a competitive advantage over smaller companies; and (3) BHP maintains substantial oil and gas operations in low political risk countries such as Australia and the United States.

DBRS has reviewed the Company’s latest capital expenditures (capex) program as well as its dividend policy and views that these programs should be credit positive. BHP announced capex cuts to approximately $7.0 billion in F2016 and around $5.0 billion in F2017 ($11 billion in F2015). The Company also moved away from a progressive dividend policy, which increased dividends every year regardless of cash flow levels, to a dividend policy that pays a minimum of 50% of underlying attributable profits; this gives BHP additional flexibility with respect to cutting dividends when needed. Additionally, DBRS views BHP’s liquidity as strong with $10.6 billion in cash and $6.0 billion in availability under the Company’s credit facility at the end of 2015. DBRS believes that BHP has sufficient liquidity to fund any near-term debt maturities and cash flow deficits. As part of the settlement between BHP, Vale S.A. and the Brazilian government regarding the Samarco dam failure, Samarco has agreed to approximately $1.1 billion in settlements to be paid through 2018. DBRS notes that, if BHP has to fund Samarco’s payments, these obligations are manageable for BHP. Furthermore, DBRS views that BHP’s refinancing risk is modest, given the Company’s long dated maturity profile.

The Negative trend reflects DBRS’s concern with the persistently weak commodity price environment going into 2016 and the possibility that BHP’s credit metrics could weaken further. DBRS expects to resolve the Negative trend within the next six months. If BHP does not reduce its net indebtedness while its cash flow remains depressed or if its credit metrics do not improve meaningfully from the current levels, a one-notch rating downgrade could occur. DBRS could change the trend back to Stable if BHP’s credit metrics improve materially and move back to (or near) the “A” rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Mining Industry (October 2015) and Rating Companies in the Oil & Gas Industry (September 2015), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.