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BG’s bet on Bolivian gas could help it to breeze past oil majors

The Times: BG’s bet on Bolivian gas could help it to breeze past oil majors

By Angela Jameson

29 July 2004

OIL prices soar and another energy company reports record profits. Sounds like a familiar story but at BG Group there is something different going on.

Of course, BG has benefited from the high oil price but that is not the whole picture. For a start, BG Group is quite a different animal from its giant cousins, Shell and BP. The company is 70 per cent dependent on gas, which means that its earnings are less volatile. And in an increasingly environmentally friendly world, it will reap the benefit of being cleaner than an oil-biased explorer.

BG is also in a very different phase of its growth cycle to the oil majors. The likes of BP are exploiting high oil prices to return large amounts of free cash to shareholders through share buybacks. But BG is still investing in new fields and routes to market. Its acquisitions in locations such as Canada, Norway and Bolivia all require cash — about £1 billion a year in the next two years.

These reasons are why BG is deemed to have better growth prospects than its rivals. Yesterday’s half-year results, with pre-tax profits up 10 per cent, merely confirmed that view.

BG’s big bet for the future is liquefied natural gas (LNG), which it believes will be one of the main energy solutions for the developed world in the next ten years. It is busy establishing itself as the premier LNG shipper in the Atlantic Basin, from which it has access to the key US, Latin American and European markets.

LNG is not delivering big profits yet but the long-term potential of markets in the US, Japan and India are huge.

Another opportunity is in Latin America. Earlier this month Bolivia voted to begin exporting gas. That could be great news for BG. It has stakes in two large Bolivian fields, whose value could be transformed by the ruling. Analysts are suggesting that the Bolivian move could provide BG with its first genuinely new project since the North Sea Buzzard find in 2001. Heavy spending on LNG should also start to tail off by 2007 as projects are brought to culmination, triggering significant cash generation.

BG’s shares are riding close to record highs and trade on 16 times earnings. That price looks full but, given that oil prices show no signs of falling, the stock is worth holding for long-term gains.

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