LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about BG Group (LSE: BG).
I'll also be asking whether these negative factors make this FTSE 100 oil-and-gas company a poor investment today.
Mastermind departed
Sir Frank Chapman stepped down as chief executive of BG at the end of 2012. Under his 12-year leadership, BG grew from what chairman Andrew Gould described as "a struggling offshoot of a former state company", valued at £9 billion, into a FTSE 100 heavyweight with a market cap of £40bn.
Over the past 10 years, BG's shareholders have seen an annualized total return on their investment of 17%. That knocks spots off the returns delivered by Royal Dutch Shell (6%) and BP (4%).
But the mastermind of BG's success has departed.
Brazil dependence
BG's future has become increasingly dependent on delivering two large-scale projects: a liquefied natural gas operation in Australia, and, more significantly, the development of massive oilfields off Brazil.
BG's acreage within Brazil's Santos Basin is being developed with state-owned operator Petrobras. BG acknowledges that the development of these fields "is a highly complex project and significant technical, operational, financial and commercial challenges will remain as the various discoveries are brought onstream and matured".
Show and tell
In 2007, BG Group delisted from the New York Stock Exchange and unregistered and terminated its reporting obligations under the Securities Exchange Act. The company gave its reasons as increased compliance costs and administration hassles due to tougher regulations of the Sarbanes-Oxley Act.
Sarbanes-Oxley, which requires companies to document their internal controls for financial reporting, was introduced as a result of the infamous accounting fraud at Enron Corporation. Investors can still trade BG on the U.S. over-the-counter market, where the company is not subject to scrutiny by the Securities Exchange Commission.
A poor investment?
Let me say first that it was widely agreed by analysts and commentators that there was nothing sinister about BG's delisting from the New York Stock Exchange: many other respectable non-US companies, including Groupe Danone and Volvo, did the same -- all citing the increased compliance costs.
Turning to the other matters, Sir Frank Chapman's departure came a little ahead of schedule -- due to ill health -- but BG already had a succession plan in place. As such, there was a smooth transition with internal candidate Chris Finlayson stepping up to the role of chief executive.
Brazil is the biggie. While BG hasn't put all its eggs in the Brazilian basket, there are certainly enough in there to raise BG's risk profile to a higher level than in the past. Finlayson acknowledges the risk but says: "If you are going to have risk concentration, I would rather have it in the best discovery in decades, where we have the largest [international oil company] position."
For me, BG has sound credentials as an asset play in its own right, with the added potential of a bid to out the value. The company has been the subject of takeover speculation on and off for years, the most recent chatter being of an £80 billion break-up bid. I wouldn't take speculation at such an inflated price seriously, but I can understand how it arises when BG's current value at 1,191 pence a share is 30% below some analysts' calculations of the true value of the company's assets.
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