Updated: Should I buy shares in BG Group?

BG Group (BG.) was the biggest blue-chip faller on Tuesday as it lowered guidance on 2013 production and liquefied natural gas (LNG) profits.

In its fourth-quarter results, the energy group announced net income of $1 billion (£0.64 billion), helped by a low tax charge of 42%. However, this represented a fall of 29%. Full-year production was up 3%, consistent with third-quarter guidance.

Lower production and LNG profits...

"I believe that 630,000 to 660,000 barrels of oil equivalent per day (bopd) is an appropriate range for our 2013 production outlook, given the risks and opportunities we face," commented chief executive Chris Finlayson.

"Given this starting point in 2013, and adjusting for the CNOOC deal, the group's previous guidance of more than one million bopd will not be reached in 2015."

In October, BG Group announced the sale of a stake in Queensland Curtis LNG project in Australia for $1.9 billion to CNOOC.

However, Finlayson stressed he expected "strong" volume and cash flow growth in 2014 and 2015: "We expect 2013 LNG shipping and marketing, on the new segment definition, to generate operating profit of $2.5 billion to $2.7 billion, slightly ahead of 2012."

Tony Shepard, analyst at Charles Stanley, noted that market expectations for LNG profits stood at between $3.2 billion and $3.5 billion, while Stuart Joyner, analyst at Investec, said that he may have to lower his growth estimates on LNG profitability, "predicated on better margins as 2010-12 hedges [roll] off".

...But new projects on track

But it was not all doom and gloom. In terms of projects, Queensland LNG appeared to be on budget and on track.

Significantly, in January, BG Group and its consortium partners announced the start of commercial production on time and on budget at the Sapinhoá field in block BM-S-9 offshore Brazil, one of the group's "big five" discoveries in the pre-salt Santos Basin. In 2013, seven projects are planned to come on stream.

In Egypt, the next phase of development for the West Delta Deep field has been sanctioned.

Disposals - part of the strategy?

The chief executive indicated that there were no 'untouchables' in firm's portfolio, albeit the strategy in Brazil for the time being appears one of adding value by moving further through the development phase.

"We maintain that a 'shrink to growth' strategy to unlock value is applicable to the entire portfolio rather than simply to BG's growth assets," said Theepan Jothilingam, analyst at Nomura.

BG "deserves a higher rating"

While the stock has jumped 10% over the past month, it has lost about a fifth of its value over the past year.

"After the October slump in the share price the share has lost some of its premium rating," Shepard noted. "However, with a focus on upstream and LNG (i.e. no refining business) and still a positive growth outlook, the share still deserves a higher rating to the other oil and gas majors."

He retained his 'accumulate' recommendation on the stock.

BG a target?

Additionally, BG Group has been rumoured to be on the radar for a number of international oil companies. With the share price languishing at a two-year low, the idea of snatching up a rich and diversified energy company at a favourable price could be attractive to international majors.

Analysts' recommendations

"For us, the BG story has never been about near-term earnings growth, but the long-term production potential," stated analysts at Killik & Co. "The group has an excellent track record of building a strong resource base, the value of which resides within the company. Looking forward, earnings growth from the new barrels in Brazil and Australia will be much faster than upstream production growth, while the group has a strong midstream (LNG) presence that is making a substantial and growing contribution to earnings growth."

However, they noted that the focus of the market was on the near-term delivery of production growth: "In this regard, the group has disappointed by failing to meet expectations on a number of occasions, with [Tuesday's] release containing a further downward adjustment to guidance. That said, we believe this was already discounted by the market."

Killik thus maintained its 'buy' recommendation, explaining: "We believe the company still has a strong resource base from which it can generate attractive cash flow over the medium term, while the recent disposals have strengthened the balance sheet. In addition, at the current level, the stock will continue to be the focus of long-standing takeover speculation."

Jothilingam also maintained his 'buy' rating, stating: "While our 2013/14 earnings per share (EPS) estimates have been reduced by c. 10%, we argue BG management has provided realistic upstream volume targets and 'beatable' LNG guidance for this year, setting the right platform to deliver sector leading volume and cash flow leading in 2014 and 2015."

Alejandro Demichelis, analyst at Exane BNP Paribas, cut his 2013 EPS estimates by 3%. "We believe that more comfort around the production outlook and potential asset sales could gradually start to close the net asset value discount," he stated, rating the stock 'outperform'.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

This article was amended on 6 February 2013 at 12.24.

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