Yesterday BG Group realed production would not increase in 2013. Questor says buy
THERE has always been a certain amount of “jam tomorrow” in BG Group’s investment case. Unfortunately, tomorrow has just been pushed further away.
Issues at various sites around the world mean that production in 2013 is now expected to be flat after a 3pc rise in output during 2012. The output figure for 2012 also looks a little light when compared with analysts’ expectations. This prompted BG’s largest ever share-price fall in morning trading.
The company has never provided any specific guidance for 2013. It has, however, said that output was expected to rise on average by 6pc to 8pc a year all the way out to 2020, with a lot of the increase skewed to the latter part of the period. The analyst community, however, had been pencilling in a growth figure of 10pc to 13pc in 2013.
BG was keen to stress that most of the negative production news related to deferral in production to future years. The exception to this is Alexandria in Egypt, where the company has not
been able to stop a decline in gas output. The group has also been slowing output from its US operations, too, as the price of natural gas there remains subdued following the shale-gas boom. The deferrals relate to Brazil and the North Sea.
In Brazil, the delay at its Sapinhoá and Lula North East wells will be caused by an “extended sub-sea tie-in”. This is down to the installation of a piece of kit that should mean a reduced future maintenance at the floating platforms to which the oil is being pumped.
In the North Sea, the issues relate to two oil fields in which BG has a stake, but is not the main operator namely Elgin and Jasmine.
Elgin is operated by French oil group Total (Brussels: FP.BR - news) and the platform had to be evacuated earlier this year following a gas leak. This issue was resolved in May, but the rig had been powered down. Production is expected to start at the end of the year, the French oil major has said.
The Jasmine field is operated by ConocoPhillips (EUREX: COPF.EX - news) . This will not now come into production until the second half of 2013, compared with previous expectations of a start-up this year.
BG is in a process of selling assets to reduce debt. There had been concerns about how BG could fund future growth with its current balance-sheet position.
At the end of September, net debt stood at a touch under $11bn (£6.8bn). BG will sell certain assets that are part of its Queensland Curtis LNG project in Australia to China National Offshore Oil Corporation (CNOOC (HKSE: 0883.HK - news) ) for $1.93bn.
It will supply CNOOC with a further 5m tons of liquefied natural gas (LNG) a year, starting in 2015. This is in addition to the 3.6m-ton agreement signed in 2010, bringing the total contracted gas amount to 8.6m tons a year. BG will therefore become the largest supplier of LNG to China.
The CNOOC deal, together with, previously announced asset disposals, should release cash of $7.6bn by mid-2013, BG said. This should ease investors’ balance-sheet concerns.
The company’s reasonably good third-quarter results were brought forward by a day so the announcement coincided with news of the deal with CNOOC.
The big question is, was the fall in the share price overdone?
BG has traded on a high earnings multiple because it has been regarded as a growth stock. Even after the plunge, the current-year earnings multiple is 12.9. With production remaining flat next year, near-term growth in earnings is less likely. The focus therefore moves to delivery. Sir Frank Chapman, its chief executive, is confident that earnings will rise by more than production.
There is also a succession issue, with Sir Frank retiring next year and Fabio Barbosa, its chief financial officer, currently on a leave of absence due to illness. This is another layer of uncertainty.
The lack of near-term growth means that the investment case now moves more to one of delivery. This goes some way to explain yesterday’s fall, as growth shares are always rated more highly.
However, Sir Frank reckons that its projects in Brazil and Australia each have the potential to generate earnings greater than the current earnings of the group as a whole. Once the group proves it can deliver, a re-rating should occur.
On the positive side, BG has some fantastic world-class assets and its recent success with the drill in places such as East Africa has been impressive. The fall in the share price is also likely to re-ignite bid speculation, which recurs on a frequent basis.
Questor last recommended a buy on July 27 at £12.46. The shares are now 8pc below that level. On balance, the falls look overdone and the rating remains buy. However, we may have to wait a bit longer to enjoy the jam.