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BHP Billiton chases oil more closely than iron ore

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(Credit: Ryan Pierse/Getty Images) MELBOURNE, AUSTRALIA - FEBRUARY 15: The BHP Billiton logo is seen at the BHP Billiton Centre February 15, 2006 in Melbourne, Australia. BHP today posted the biggest interim profit in Australian corporate history. The world's biggest mining company announced a half-year after tax profit of $5.9 billion AUD ($4.37 billion USD) a rise of almost 48 per cent from last year.BHP Billiton Announces Record Financial Results
February 23
5:23 AM 2016

Shares of BHP Billiton, a mining and petroleum firm in Melbourne, started chasing oil prices very closely as they entered into the horrible downturn period in the oil industry. The UBS Group has valued the miner, which has a large petroleum component, at about $25 billion.

So while, the prices of base metal and iron ore are expected to weaken in the decade owing to the poor growth in China, but the shares of the miner profited from an anticipated recover in oil prices. In January, the shares of the miner dropped to the lowest in the Sydney trading session. Meanwhile, analysts expect the Melbourne-based miner to post an 86% fall in its first six-month earnings, as reported by Bloomberg.

Michelle Lopez, Aberdeen's investment manager, said Bloomberg that BHP Billiton tracks oil very closely than the iron ore market. Prices of iron ore are expected to be at about $45 per metric ton after a historical slump in December, owing mainly to the poor demand in China. Blackstone Group expects crude prices to be in range of $65 - $75 per barrel in the next four to five years.

According to The Motley Fool, BHP Billiton outstripped the S&P/ASX 200 index in the previous few weeks period, owing mainly to the rebound in the iron ore and copper prices. Iron ore, a vital commodity of the miner, rallied to US$48.52 per tonne and copper also rebounded at the highest levels on Friday. However, the price of the Brent crude is still at US$33 per barrel and analysts hope the price may rebound in the future.

According to the average estimate of 28 analysts collected by Bloomberg, London Brent crude is expected to trade at $49 per barrel during the fourth quarter of 2016. While, the average estimate of 26 analysts expects crude in New York to trade at $47 per barrel in the end of 2016. The fall in iron ore and oil prices are expected to trim the miner's half-year underlying profit to $751 million, according to the median estimate of 5 analysts.

The miner could trim its dividend by nearly 75 pence after announcing a US asset write-down of $7 billion. Richard Knights of Liberum said that even if the company slashes its dividend to zero, it requires crude prices to be higher than $60 per barrel to report a good earnings results, as reported by The Telegraph.

According to Glyn Lawcock, an analyst at UBS, there is a hidden factor that is causing the slow performance of BHP's shares, apart from the iron ore prices. Analysts expect the miner to rally by nearly 50% in the coming months following a rebound in the crude prices. The company is hopeful regarding its prospective amid the economic downturn.

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