BP or BG? That Is the Question.

Sometimes in life you have to face up to the big issues, and that's what I'm doing right now. 

Which U.K.-listed oil and gas giant looks more tempting: BP  (LSE: BP  ) (NYSE: BP  ) or BG (LSE: BG  ) ? That is the investment question I'm asking myself today.

Give me a B!
First, I'll declare a double interest. I already hold stocks in both companies.

I'm a long-term investor in BP, and topped up my holdings in the wake of the Gulf of Mexico oil spill.

I only bought BG Group a few months ago, after its share price dipped nearly 20%. Both stocks have suffered the slings and arrows of outrageous fortune lately, but which is better placed to recover?

At the worst point of the Deepwater Horizon crisis, it seemed like BP might shuffle off this mortal coil for good. However, the group has pieced its life back together after the traumas of June 2010, but investors must still brace themselves for painful flashbacks, as the compensation saga continues.

Shortly after BP reached a settlement in the U.S. courts over criminal charges, it was struck with a new $34 billion claim for alleged economic losses and punitive damages from local and southern state governments in the U.S., including Louisiana and Mississippi.

The Americans seem determined to gouge every last dollar out of the incident, so more claims could follow. It will be a long time before BP will be allowed to forget this tragedy.

Trouble is my business
Yet BP's share price has climbed 8% in the last eight months, helped by its recently posted Q4 profit of $3.98 billion. That was down from $4.98 billion last year, but it still beat market expectations.

BP set aside another $4.1 billion to cover oil spill claims, taking the total cost so far to an almighty $42 billion (and counting).

A drop in the value of its shale gas assets and a decision to scrap a flagship drilling project off Alaska added to BP's sea of troubles, but it wasn't all bad news.

Indeed, BP's net debt fell from $31.5 billion to $27.5 billion during the last three months of 2012.

Plus, the firm's new exploration alliance with Kremlin-backed Rosneft, which won't generate as much cash as the doomed TNK-BP joint venture, should create fewer political troubles.

What's more, BP has offloaded another $38 billion worth of assets since 2010, and has completed its program of portfolio simplification one year ahead of schedule.

And BP has four new major upstream projects in the pipeline this year, in Angola, Australia, the Gulf of Mexico, and Azerbaijan, with a further six to follow in 2014.

BP will be
Despite the recent recovery, BP's share price is still down 4% on twelve months ago, against a 6% rise from the FTSE 100.

Its dividend is no longer the gusher of yore but investors still get a yield of 4.7%, against 3.5% for the FTSE 100 as a whole. The share trades at 12 times earnings, which reflects continuing market suspicion about its uncertain prospects.

Future earnings per share (EPS) growth looks more promising, though. After a massive 55% drop in 2012, EPS is forecast to grow 50% this year.

BP is still the unhappy heir to a thousand natural shocks, most of which will be administered in a U.S. courtroom, but it still looks too big to fail in the long term.

Or BG?
I like buying big companies on bad news, which is why I splashed out on BG Group in November, after the gas and oil exploration giant admitted it wouldn't grow as much as it had previously forecast during 2013.

As with BP, the road to recovery will be longer than I first hoped.

BG's recent Q4 and full-year results didn't help, as it admitted it wouldn't grow during 2015 either.

The company's admission that it would miss its medium-term production target of one million barrels of oil equivalent per day by 2015 triggered a 2% share-price dip.

Profit for the year did rise 3% to $4.4 billion, and as management carefully explained, the dip in Q4 profits looked worse than it was, because Q4 results in 2011 were enhanced by a $277 million tax credit.

Cash flow was up 10% to $10.7 billion. Group revenues also rose, from $17.7 billion to $18.9 billion. Better still, the full-year dividend was increased by 10% to 16.67 pence per share.

Power failure
The market still doesn't trust BG -- investors expect energy companies to hit their production targets.

Like a penalty kick in football, you're supposed to tuck it away with ease. One miss might be forgiven, but two suggests you haven't got it.

BG's management has a lot of work to do to convince the market it can recover its lost form and that it hasn't turned from a flashing winger into a defensive plodder.

New chief exec Chris Finlayson has been doing his best, highlighting major new projects in Brazil and Australia, and a record 55 new wells drilled in January. He also predicted strong volumes and cash flow growth in 2014 and 2015. Now he will have to deliver.

Aye, there's the rub
Despite that 10% dividend hike, BG yields a lowly 1.6%, scant reward for the patience this stock demands right now.

Yet the share price is up nearly 10% over the past month, which suggest investors are willing to give it time. It is now trading on a P/E of 13.7, making it a tad more expensive than BP, and a lot pricier than the other U.K.-listed oil major Royal Dutch Shell. You can currently buy Shell at just 8.1 times earnings and grab a 4.9% yield, more than three times the income you get from BG.

Major decision
Let's not confuse matters by hauling in Shell. The question is: BP or BG? I'm happy to hold both, but if I was buying just one, BP would be my choice, by a bare bodkin.

Both stocks are likely to struggle in the short term, and require a deep well of investor patience. Both must bear the whips and scorns of energy price swings, oil spills, natural disasters, political risk and other calamities. The major difference is that BP rewards your endurance with a 4.7% income.

The power is yours
Another FTSE-listed power company offers an even more generous income of 5.7%, and with much less volatility than BP, too.

To find out what share it is, simply download our free Motley Fool guide: Power Up Your Portfolio.

We have singled out this stock because it offers one of the best yields in the FTSE 100 -- and a far sight more than you can get on cash. The report is completely free, so just click here to download it now.

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