Deutsche Bank downgrades BHP

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Deutsche Bank has downgraded BHP to “hold” because the big miner is close to peak oil production.

Today BHP is trading at $28.74 and Deutsche Bank has a 12 month price target of $33.40.

“With the demerger of South32 complete and cost out ongoing we think BHP’s focus now turns to growing its oil and copper divisions,” says Deutsche Bank. “But there is a problem. Oil production will peak in FY15 due to a drop in US onshore volumes, conventional field decline and a lack of growth options.”

The prospects for growth are flat, driven by poor oil exploration success, challenging US onshore economics and a shortage of good minerals projects, as this chart shows:

“The new look BHP is simpler, lower cost, lower risk, and retains a strong balance sheet that will allow the company to invest through the cycle and pursue its growth strategy,” says Deutsche Bank.

“We think additional cost-out from the group’s four “pillars” will exceed the $US 4 billion target by several billions and that divestments of non-core assets will continue. However we think the big change coming is within the oil division.”

In January, BHP announced it would shut down 40% of its US shale rigs over by the end of its fiscal year in response to falling oil prices.

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