BG Group on the Way Back up

LONDON -- Six months ago, shares in BG Group  (LSE: BG  ) (NASDAQOTH: BRGYY  ) plunged 18% after it warned of reduced production growth. But now, with the stock still 8% below its pre-profit warning level, things are starting to look up.

Last week Deutsche Bank joined the growing numbers of brokers to upgrade BG to a buy, citing improved outlook in the company's two arms: exploration and production, and liquefied natural gas (LNG). It thinks the company's prospects are at a turning point, and the valuation is undemanding. That follows recent upgrades from Canaccord Genuity and Jefferies.

Now some people put store by brokers' recommendations, and some don't. But the upgrades are significant in BG's case because of why its shares dropped in the first place. BG didn't issue a conventional profits warning but told investors that the following year's production would be flat, against expectations of 10% growth.

The markets lost faith in BG's management, and punished the shares. Broker upgrades are an indication that the City is starting to trust the company again -- and that should be good news for the shares.

Back to the future
CEO Chris Finlayson updated investors on BG's strategy yesterday. It plans to shift focus back on its strengths in exploration and its integrated LNG business. That means increasing exploration spend, and "monetizing" the company's assets to reduce capital expenditure and production risk.

It's taking BG back to what it was before it became a victim of its own exploration success. That exposed the company to bigger production challenges than it's been accustomed to.

"Monetization" means bringing in partners to accelerate returns and share risk. Last month saw a great example. BG sold an interest in its Australian LNG assets to China National Offshore Oil Corporation (CNOOC) for $1.9 billion.

At the same time, it secured a deal to sell 5 million tonnes of LNG to CNOOC each year for the next 20 years, making BG China's largest supplier of LNG. The company can source the LNG from anywhere, exploiting the global economics of the LNG market: gas is transported from lowest-cost producer to highest-paying consumer. BG and CNOOC are building a couple of LNG tankers together, too.

Confidence
BG expects its new measures to deliver positive free cash flow from 2015. It still has big production risk in Brazil, where it's dependent on operator Petrobras (until or unless some of those assets are monetized), but management's confidence is starting to rub off on brokers. The shares are trading on a prospective P/E of 14.6.

Oil and gas is a sector with big rewards, but big risks. That's why it's important to diversify, and to pick stocks carefully. The Motley Fool has prepared a guide to help you. "How to Unearth Great Oil and Gas Stocks" is packed full of tips. You can download it by clicking here -- it's free.

link


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2433691, ~/Articles/ArticleHandler.aspx, 4/20/2014 12:35:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement