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Barclays recommends BHP Billiton over Rio Tinto
Barclays analysts upgraded BHP Billiton's rating to 'overweight' on Friday and reduced that of Rio Tinto to 'equal weight', citing an expectation that BHP will close ground on Rio Tinto following five years of underperformance.
In a research note sent to clients, Barclays said the driving factor is the projected monetisation of BHP's US shale acreage, with potential upside depending on valuations attributed to the Permian Basin acreage in particular.
With oil prices and shale valuations were on the rise, powered by recent changes to the US tax code, they saw scope for the company to return between $7.8bn and $11.1bn in cash proceeds to shareholders as a result.
The analysts forecast those sales had the potential to add between 7% and 9% to the company's yield and to provide a boost to returns on equity.
Elsewhere, analysts said that a "more aggressive" approach to addressing equity underperformance was potentially possible.
"Additional non-core asset sales are one option. We see $9.5bn (8% of market cap) of potential proceeds based on NPV, equivalent to 'a second shale' in terms of both quantum and potential impact on ROE. Assets include Cerro Colorado, Nickel West, UK & Algeria petroleum, Samarco, Cerrejon and Mt Arthur," they said.
They also suggested that the company could ration commodity supply of iron ore, as Rio Tinto has successfully done with iron ore, because the company holds a large enough market share to move the price.
"We believe the various catalysts outlined above offer a credible pathway to materially improve returns on capital and underpin a meaningful step-up in shareholder returns, which in turn should set BHP up to regain its premium rating," they explained.
Barclays also boosted BHP's target price to 1,800p per share from 1,600p.
Rio Tinto, meanwhile, saw its target price remain static at 4,400p.
The Rio Tinto downgrade from 'overweight' meanwhile was a reflection of the company's shares now looking expensive in comparison to those of BHP "despite lower margins, lower returns post-shale sale, lower forecast growth" and limited strategic options to rebalance away from iron ore.
As of 1524 BST, BHP Billiton's shares were up 2.21% at 1,592.40p while Rio Tinto's were up 1.21% at 4,050.50p.