The Week In Review: BHP Billiton enjoys boom in oil and commodity prices

Like the big oil companies, the world's mining majors are experiencing an embarrassment of riches due to very high commodity prices. BHP Billiton is in the happiest position: it is both the world's biggest miner and has a substantial oil production business, too.

Like the big oil companies, the world's mining majors are experiencing an embarrassment of riches due to very high commodity prices. BHP Billiton is in the happiest position: it is both the world's biggest miner and has a substantial oil production business, too.

The company reported an 83 per cent jump in profit for the year ended June, a whopping $3.5bn (£1.9bn), and is forecast to make $5bn next time around.

The reason for the bonanza is that global demand for raw materials has boomed, and stockpiles have been whittled down, thanks to improved economic growth and the industrial revolution in China.

Although Chinese growth has moderated slightly, the economy there is still roaring ahead by any standard. Chinese industry has a voracious appetite for the commodities that BHP Billiton can supply, such as copper, aluminium, iron ore and coal. The company's profits from selling base metals, for instance, were up more than 300 per cent in the year.

The message is that these prices levels - in many cases the highest seen in years - are set to continue. To take advantage, the company has been bringing new mines on-stream.

BHP Billiton's size and its oil business give it the widest spread of products all across the globe, making it the ideal investment in this sector. Buy.

EDINBURGH OIL & GAS

This company is why many people play the stock market. What was a speculative little oil explorer hit the big time three years ago when the Buzzard oil field, in which it holds a 5 per cent stake, turned out to be the biggest oil find in the North Sea in more than a decade. The shares are up eightfold. Work to build the rigs is about 30 per cent complete, is on time and is on budget. Oil should start flowing by October 2006, and the shares are still a buy for the bold punter.

TURBO GENSET

Turbo Genset could offer the hope of a new mobile power generator that will allow businesses to become self-reliant, gen- erating their power on-site, and environmentally friendly. But it has taken longer than expected to develop the kit, and the company is struggling to find a commercially viable product. The first commercial sale of a 1.2MW generator, to a US landfill company, is akin to a pilot project, and the company is on course to run out of money by this time next year. The wait for a positive return for shareholders may be some time longer.

ISIS ASSET MANAGEMENT

Investors in Isis could be forgiven if their heads are still spinning. The detail of the company's merger with F&C is highly complex, and it is only gradually becoming clear what will emerge from the other end. The enlarged group will be the UK's fourth largest UK fund manager, but Isis shareholders are paying a high price for F&C and doubt has been cast over whether the current dividend per share is sustainable. Existing investors should take the long view and be prepared for a bumpy ride. For the prospective buyer, Isis is one to avoid while the risks are this high.

LOOKERS

Rising interest rates threaten to curb our appetite for new cars, making financing deals less appealing and making us generally feel poorer. But cars are not expensive really, with oversupply likely to keep prices low and demand ticking over. For safety's sake, though, Lookers, the Manchester-based car dealership group, spent £31m last month to acquire a parts distributor, taking it further into the higher profit, less seasonal after-sales market. Even after Lookers shares' powerful rally, there is still gas in the tank.

COFFEE REPUBLIC

Too many operators rushed to opencopies of the Starbucks format, and most retired hurt. Coffee Republic has halved the number of its shops and is moving into deli bars. Four are trading in the new format, serving scrambled eggs and bacon for breakfast, pasties for lunch, and made-to-order sandwiches all day. It sounds costly to do all this on site. Then there is the question of whether the company will get the cash to fund a proper roll-out next year. Its future is not assured. Cut losses.

INVU

Invu aims to bring the sort of sophisticated document management software that was previously the preserve of large corporations to the small business world. With projected sales growth of more than 50 per cent a year and with break-even for the first time this year, Invu ought quickly to justify its share price. Buy.

BAE SYSTEMS

Those of us who put a veil over our conscience when choosing stocks might decide that now is an obvious time to be buying a company whose products include fighter jets, naval frigates and torpedoes. But BAE Systems is struggling to recover from several years of internal problems, and there are just too many things to fear. UK defence cuts mean less work in the long term, and there could be a scaling back of orders for the first-generation Eurofighter, too. Military spending could come under pressure in the US as the presidential winner tackles the deficit. And the political situation in Saudi Arabia looks increasingly uncertain. Avoid.

BPP

The fallout from the City's post-Millennium recession is still being felt by BPP, which trains financiers and accountants. Most of its students are signed up for multi-year courses, so a slowdown in recruitment feeds through the system only gradually. The upturn, too, will be a while yet, although one City headhunter said this week that the recruitment of accountants has surged this year. BPP will have three law schools open by this time next year, an investment that has been managed despite the tough trading conditions and while being able to grow the dividend. Buy.

Invest in staples of life

The economic havoc that could be wreaked by the soaraway oil price of recent weeks is just the latest in a long line of reasons to invest in the UK's utility companies. Their wares - water and electricity - are the staples of modern life, and demand does not ebb and flow with the economic tide.

The water industry is being allowed to raise bills to fund improvements to the nation's sewers, and the companies that can make these improvements most efficiently and cut most costs in their day-to-day operations will be the ones with the most cash to hand back to shareholders.

So who might those be? Probably not Northumbrian Water, which is burdened with more debt than the average. Also avoid AWG, where the regulator is demanding very tough operating efficiencies which the company might not meet. The more efficient operators, like Severn Trent and Pennon have the most appealing mix of a cheap share price and likely dividend growth.

Northern England's United Utilities, which straddles the water and electricity sectors is worth holding for the already huge yield and the balance sheet strength afforded by its £1bn two-stage rights issue.

In electricity, we would be buyers of both Scottish and Southern Energy and ScottishPower, the former for the security of its dividend, the latter for growth prospects in the US power market.

International Power, which has just been on a buying spree of power stations, has promised to begin paying a dividend, but only a modest one, and it still looks an unappealing beast.

National Grid Transco, the gas and electricity networks business, ought to outperform the sector as it sells off its unwanted local gas pipes.

And pick of the utilities stocks continues to be Centrica which, after the sale of the AA, has enough cash pouring in from its British Gas business to pay for new power generation and storage assets and generous returns to shareholders.

The above is a selection from the daily Investment Column

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