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BHP Billiton Ltd’s shares began tracking oil prices more closely last year as they headed into the worst energy market downturn in a generation. It may not seem like it, but that could be good news for the world’s biggest miner.

Unlike its rivals, BHP has a substantial petroleum unit, valued at about $25 billion by UBS Group AG. So while iron ore and most base metal prices are forecast to languish over the remainder of the decade as growth in China slows, the Melbourne- based company’s stock stands to benefit from a projected rebound in crude oil.

BHP needs an edge. Its Sydney-traded shares sunk last month to the lowest since 2005 and it’s forecast to report a 86% drop in first-half earnings on Tuesday. On top of that, the producer’s ultimate liability for the deadly Samarco dam burst in Brazil late last year remains uncertain and it’s been warned by Standard & Poor’s that it may face a second credit rating downgrade this year.

An oil rebound could deliver a reboot with Schroders Plc saying this month prices may rally almost two-thirds to as high as $50 a barrel in a few months. BHP has flagged it’s on the lookout for petroleum assets, and is likely to study adding more conventional assets, particularly in the Gulf of Mexico, if distressed competitors are forced to sell, according to Aberdeen Asset Management Ltd.

BHP “follows oil a lot more closely than iron ore these days," Michelle Lopez, a Sydney-based investment manager at Aberdeen, which holds BHP shares among the $428 billion of assets it manages globally, said by phone. “When you look at the forward curve, iron ore still looks like it’s going to be at these levels if not a bit lower, whereas there are expectations of a correction in the oil price."

Iron ore prices are forecast to hold at around $45 a metric ton out to the end of the decade after concern over demand from China saw the material slump by more than 75% from a 2011 peak to a low of $38.30 a tonne in December. Blackstone Group LP sees oil prices returning to $65 to $75 a barrel in four or five years, after benchmark Brent oil blend reached a 12-year low of $27.10 a barrel last month.

Oil accounted for 32 percent of BHP’s underlying profit in fiscal 2015, compared with 39% from iron ore and 24% from base metals, according to data compiled by Bloomberg. Every $1 dollar per barrel change in crude oil impacts BHP’s net profit after tax by $52 million, according to an August filing. Melbourne-based BHP declined to comment Monday on the potential boost it may receive from an oil rebound.

“Over the longer term, oil normally adds a diversification benefit," Scott Rundell, Sydney-based chief credit strategist at Commonwealth Bank of Australia said by phone. “If I gaze into my crystal ball, oil will recover well before iron ore."

Shale assets

Analysts are projecting prices will climb more than $16 by the end of 2016. Brent crude in London will trade at $49 in the fourth quarter, according to the median of 28 estimates compiled by Bloomberg. New York crude will reach $47 a barrel in the same period, the median of 26 estimates shows.

The slide in oil and iron ore prices in the six months to 31 December is forecast to slice BHP’s underlying profit to $751 million over the period, from $5.4 billion a year earlier, according to the average of five analyst estimates compiled by Bloomberg.

BHP’s $20 billionspree to add US shale assets in 2011 has been subject of market concern and the company has already flaggedit expects to book pretax charges of $7.2 billion against this unit when it reports earnings. If weak prices persist, then the company’s expected cuts to its dividend and spending at Tuesday’s results are likely to be in vain, with a debt-rating downgrade to A- likely and a further cut to BBB+ possible, Macquarie Group Ltd analysts wrote in a 17 February note.

The producer’s shares have underperformed rivals like Rio, which doesn’t have oil assets, in the past year, UBS analyst Glyn Lawcock said by phone from Sydney. “Clearly there’s something else driving BHP’s under-performance, other than iron ore," he said. “The only thing left by deduction is oil and gas."

BHP could rally by about 50% in the six to nine months after oil prices rebound, based on its average performance in the past, according to Shaw and Partners Ltd analyst Peter O’Connor, who studied both crude’s performance and the response in BHP’s shares after six crisis events in the past six decades, from the Yom Kippur war to the current China-fueled sell off. Bloomberg

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