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BG burns as bright as sector’s giants

Financial Times: BG burns as bright as sector’s giants: Royal Dutch/Shell is also expected to report impressive earnings today as a result of higher oil prices.

By James Boxell

Jul 29, 2004

BG Group continued to match its bigger rivals yesterday as it reported a sharp rise in second-quarter profit on the back of record energy prices and continued growth in production.

The UK-based oil and gas exploration company revealed a 20 per cent rise in underlying earnings, a day after BP announced a 23 per cent rise in second-quarter profit. Royal Dutch/Shell is also expected to report impressive earnings today as a result of higher oil prices.

Production volumes in BG’s key exploration and production division, which accounts for most of its profit, rose by 5 per cent in the quarter, although this was down from 9 per cent in the year’s first three months.

BG’s share price has outperformed the energy sector in 2004 as investors have warmed to its sector-leading production growth. Shares rose a further 11¾p, or 3.57 per cent, to 341p yesterday.

Most of the production increase came from the commencement of exports from the Karachaganak project in Kazakhstan, which had been hit by pipeline problems, and an Egyptian operation.

Analysts said the results contained few surprises, although there were concerns about higher operating costs. There was also slight disappointment about the 10 per cent decline in operating profit at the liquefied natural gas division, which is key to BG’s growth plans.

Frank Chapman, chief executive, said the company was still locked in talks with the Kazakhstan government over the sale of its 17 per cent stake in the Kashagan field but he refused to set a deadline.

BG had previously agreed to sell the stake to commercial partners but the Kazakh government claimed the right to pre-empt any bid.

The stake is worth $1.2bn (£658m). Mr Chapman said he did not believe there was any link between the stake sale and a $5.4m tax dispute with the Kazakh authorities, which he said was a “routine tax audit”.

Group turnover for the second quarter was £968m (£891m). Pre-tax profit was £402m (£285m), although this was lifted by a £70m profit from disposals. Earnings per share were 6.6p (4.7p). The interim dividend is 1.73p.

FT Comment

* BG has produced another set of steady numbers and has yet to offer anysigns that its strategy for growth will not be delivered. Investors are backing a strong management team with a track record of delivering organic growth and production volumes that are the envy of the industry. However, these factors are all well-known and the market has done a good job of pricing them in. Expected profit for 2004 of about £1.3bn puts BG on a forward p/e of about 15.5, a hefty sector premium. As long as it keeps hitting targets each quarter, the rating remains justified. But there is little margin for error.

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