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Daily Telegraph: The Questor column: BG Group

Edited by James Quinn
BG Group
Shares: 725p +29p
Questor says Buy

It is not all bad news in the oil and gas sector. BG Group’s upbeat forecasts yesterday about production growth were in sharp contrast to the recent pessimism of BP and Royal Dutch Shell.

BG’s confirmation of an earlier target that it expected to grow production by between 5pc and 7pc until 2009 sent its shares to a six-month high.

There had been nervousness among BG watchers because the company’s bigger rivals have either downgraded forecasts or predicted modest growth.

The positive outlook for BG was reflected in the company’s fourth quarter results, which were ahead of most analysts’ forecasts.

One highlight was the Liquefied Natural Gas division, whereby gas is frozen to make it easier to transport, which saw profits rise 42pc despite falling natural gas prices.

BG said its 2006 portfolio will still be producing at 85pc of 2006 levels in 2015. That’s an underlying decline of just 1.8pc, demonstrating the immaturity, and lasting potential, of BG’s fields.

The company and its partners have just begun producing oil from the Buzzard field in the North Sea, which is tipped to be the UK’s biggest oil discovery for more than a decade.

Such exploration successes meant that BG increased its resource base last year by 15pc, or about 1m barrels. Compare this with Shell, whose hydrocarbon production is six times higher than BG, but still managed to add just 2m barrels last year.

Such exploration costs money, of course, and BG continues to invest heavily – about £2.2bn this year.

In spite of this, it is still able to finance share buy-backs, announcing another £750m programme yesterday. That may be modest by BP’s standards, but shrinking the equity base will pay dividends – literally – in the long run.

Based on Credit Suisse estimates, BG trades on a 2008 price-earnings ratio of 12.6 times, which is a premium to BP, on 10.7 times, and Shell, on 9.5 times.

Although much of BG’s potential is already in the price, not all of it is and the shares are still worth buying.

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