Since the start of 2015, BHP Billiton’s (LSE: BLT) share price has fallen by 44%. A key reason for this is a continued decline in the price of a number of commodities, notably iron ore and oil of which BHP Billiton is a major producer. And, while a portion of the company’s share price fall is due to the recent tragedy at the Samarco mine in Brazil, a collapsing commodity market accounts for the bulk of the company’s share price collapse.
Of course, a number of investors have decided that resources companies such as BHP are now set for a prolonged period of decline. A key reason for this is that the Chinese commodity bubble is bursting and, with renewable energy becoming more in-demand and more widely available, companies focused on oil production such as BHP are no longer as appealing as they once were.
This is a key reason why hydrogen fuel cell producer AFC Energy (LSE: AFC) has posted a share price gain of 100% since the turn of the year. Certainly, its shares have themselves fallen heavily in recent months, but this could be profit taking since the company continues to make encouraging progress with its Power-Up programme, which is set to demonstrate the world’s largest alkaline fuel cell system later this month. This represents the final step in the company’s pre-commercialisation technical development programme and could act as the springboard through which it deploys its product across the globe.
Clearly, there is a huge difference in size between the two companies. BHP has a very sound balance sheet, is geographically very diverse and produces a wide range of commodities. On the other hand, AFC Energy has a market capitalisation of just £58m and lacks the financial firepower and stability of BHP Billiton, with it being a much higher risk option than its larger peer.
Furthermore, BHP may be better positioned for the long haul than many investors presently realise. It has refreshed its strategy and has spun-off a number of non-core assets so as to allow it to focus on assets through which it has the potential to generate efficiencies. And, with BHP having a relatively low cost base and having increased production in recent months, it could emerge in a stronger position relative to its resources sector peers as the present low commodity prices hurt them more than they hurt BHP.
Looking ahead, the world is set to derive a higher proportion of its energy from cleaner sources and this is a key reason why AFC Energy could have a bright long term future. However, fossil fuels are still likely to have a prominent position within the world’s energy mix, thereby making BHP an appealing long term buy – especially with its shares now trading at a ten-year low. As such, the answer could be to buy both companies, with the two stocks both offering high potential returns but also significant risks, too.
