Market Insight: is BHP a Hold Sell or Buy?
The Big Australian Slims Down
You can’t go past BHP Group (ASX:BHP) this week. The Big Australian is spinning off its oil and gas assets into Woodside Petroleum (ASX:WPL), which gives BHP shareholders a standalone oil and gas exposure. It’s another huge deal but it says so much about investing.
In the past, investors relied much more on conglomerates to get instant diversification. This is no longer the case with more than 2500 companies listed on the ASX alone. BHP’s investors have been telling them for some time to get rid of oil and gas. Why? Because they can better energy exposure from pure oil and gas companies.
How should I invest then?
A combination of Blue Chips and Small Caps provides you with discrete exposure to many different industries in various stages of their life cycle. Which brings me to the second key takeout in BHP’s spin off of its oil and gas business: it’s simplifying its business to focus on forward facing commodities – like copper and nickel for batteries and potash for fertiliser. As our analyst says, “BHP’s petroleum divestment is a signal of intent for increasing leverage to the electrification and decarbonization megatrends.”
Another takeout is that energy is being disrupted. This is why we’ve been focusing on lithium and batteries in our Small Cap publication. Although to be fair, we are supportive of that great Australian listed conglomerate Wesfarmers (ASX:WES) in part because of its lithium exposure via a giant WA development.
This transaction also emphasises the importance of a strong balance sheet. If you don’t have that and you’re a Blue Chip, you’re in trouble. This is a big reason these oil and gas businesses are merging. Remember the $23bn merger between Santos (ASX:STO) and Oil Search (ASX:OSH) still in progress.
If a company doesn’t have a strong balance sheet, what do you need as an investor?
You need growth! This means the company will be able to raise capital relatively easily, without diluting your interests.
I come back to the point about investing. The big learning is that diversification is crucial because it spreads your risk providing you with different irons in the fire. This is where a combination of Small Caps and Blue Chips is essential.