Leading broker gives buy rating to BHP (ASX:BHP) shares

The BHP Group Ltd (ASX: BHP) share price is out of form on Wednesday and dropping lower.

At the time of writing, the mining giant’s shares are down 2% to $35.52.

Is this a buying opportunity?

If you’re interested in adding some diversification to your portfolio by investing in the resources sector, then I think you ought to consider this share price decline as a buying opportunity.

I believe BHP is the highest quality company in the sector and a great option at the current level. Especially given its generous yield, favourable commodity prices, and its growth opportunities.

One broker that agrees that this is a buying opportunity is Goldman Sachs.

In response to its acquisition of a further stake in the Shenzi asset in the Gulf of Mexico (GoM) on Tuesday, the broker has retained its buy rating and $40.10 price target on BHP’s shares.

This price target implies potential upside of approximately 13% excluding dividends and 18.5% including them.

What did Goldman Sachs say?

Goldman Sachs was pleased with the company’s decision to acquire a greater stake in the Shenzi asset.

It commented: “Shenzi is currently 44% owned (this will increase to 72% if the acquisition closes) and operated by BHP. The transaction implies a valuation of c.US$1.8bn (100%); we currently value Shenzi at c.US$3.5bn (100%) using our long run oil price of US$60/bbl (real), and see this being a highly accretive acquisition.”

The broker also believes that other acquisitions in the area could be a smart move by management and add value for shareholders.

“We continue to think bolt-ons in the GoM make sense, including BHP pursuing accretive opportunities in the current environment that utilise existing infrastructure to unlock high returning brownfield growth, or infrastructure exposure to help unlock new frontiers, such as T&T deepwater gas and conventional oil in the Western GoM,” it explained.

Why is Goldman Sachs buy rated?

There are four key reasons why Goldman Sachs has a buy rating on BHP’s shares.

The first is its current valuation, noting that its shares are trading at 0.92x their net asset value.

It also likes the company due to its positive view on oil, copper, and met coal prices in 2021. These represent 35% of its operating earnings. In addition to this, it sees plenty of organic growth options across the aforementioned commodities.

Finally, it believes “BHP will win the Pilbara capex, margin and FCF/t battle over RIO and FMG within the next 2 years post the ramp-up of the high grade South Flank mine.”

I think Goldman Sachs is spot on and BHP is well worth considering today.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 rises on mixed day, big gold merger
• ASX 200 down 0.2%: Northern Star & Saracen announce mega merger, IAG settles class action
• BHP (ASX:BHP) share price lower after US$505 million Shenzi oil investment
• Top brokers name 3 ASX dividend shares to buy today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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