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Investors question their love for BG as problems persist

BG revealed problems at key projects, after a share price drop earlier this year

BG Group's investors have had a rocky ride over the past year. Shares fell from a two-year high of £13.50 ($21.09) in October 2012 to £10 at one point. After clawing back most of those losses earlier this year, the price has slipped again, trading around £12 in mid-October.

The latest setback began on 9 September when the company revealed problems at key projects, casting further doubts over its production outlook for next year.

Although BG hasn't provided exact guidance for 2014, it said a combination of disruptions to its Egypt operations, project delays and continuing weakness in US gas prices would knock 47,000 barrels of oil equivalent a day (boe/d) off next year's production. The consensus for BG's average production in 2014 was around 720,000 boe/d, an 8-14% increase from the 630,000-660,000 boe/d range the company set for 2013 in February.

The announcement wasn't unexpected; when BG released its second-quarter results on 26 July it showed quarterly production fell 2% year-on-year to 657,143 boe/d as the political situation in Egypt - which in 2012 accounted for 20% of production and 15% of its profits - took its toll. BG said more of its gas had been diverted to the domestic Egyptian market, leaving less available for more lucrative liquefied natural gas (LNG) exports. BG said net profit fell 3% to $986 million in the second quarter.

Explaining next year's reduced production, BG said to offset low US gas prices, it intends to reduce the number of rigs it operates there. In Egypt, political upheaval has delayed the start of phase 9a of its West Delta Deep Marine project. "With the new government, we are having good dialogue with them, and they are coming forward with potential solutions for a number of problems that we have," chief executive Chris Finlayson said on 9 September.

On their own, these events are not serious: BG said its production target for 2013 remained unaffected and forecast that production will reach 825,000 boe/d in 2015. But what disappointed investors, causing the shares to fall more than 5% on the day, is that this is the third time in a year BG has been forced to cut its production outlook.

In February, BG gave up on ambitions to become a producer of 1m boe/d by 2015. In October last year, it warned investors to expect no output growth in 2013 due to project delays and a reduction in its US shale gas activities. The increased focus investors place on production is the company's own doing. 

BG built a stellar reputation as an explorer over the past 15 years, with Bloomberg data showing it has enough resources to keep producing for the next 73 years after making major discoveries in Brazil, Tanzania, Egypt and Kazakhstan.

However, since its exploration success in Brazil, investors have criticised the company for cost overruns at big projects like Australia's Queensland Curtis LNG project, whose cost last year was raised to $20.4bn from a previous estimate of $15bn. BG has three other LNG projects in the works - Prince Rupert Sound in Canada, Lake Charles in the US and Tanzania - all of which it might either sell or reduce its equity in as it looks to generate returns for shareholders earlier in the project life cycle.

Alongside this, BG said it will reduce capital expenditure on major projects to between $8bn and $10bn a year from 2015, compared with $12bn a year currently. This should result in strong production growth and give the company positive free cash flow from 2015.

While nervous investors may be dumping the stock, buy-side analysts remain upbeat. "The long-term growth case appears intact with the critical developments in both Australia and Brazil on track," says Liberum Capital's Andrew Whittock, who is one of seven analysts with a "Hold" recommendation on the stock according to data provided by Thomson/First Call.

Indeed, in Australia BG has already drilled 75% of the more than 2,000 wells needed for Queensland Curtis LNG's first two trains. In Brazil, BG's net production in in the first half of 2013 was just 36,000 boe/d, less than 6% of the company's total output, but it estimates the Santos basin cluster of pre-salt fields will provide net production of 500,000 boe/d by 2020.

Elsewhere, BG has hit more gas with the Mkizi-1 well in Block 1 offshore Tanzania, whose estimated recoverable resources are 600bn cubic feet (cf). This gas will be shipped out of the country's first LNG plant that will be built with Statoil.

It is, however, unlikely to be as lucrative as its Equatorial Guinea LNG project. In July, Reuters said this project has proved to be one of the most lucrative LNG deals ever, generating nearly $1bn a year for BG. This is because the 2004 contract allows BG to buy all Equatorial Guinea's LNG for 17 years at a fixed discount to the US Henry Hub prices, currently near historic lows, but keep almost all the profit by selling the gas to Asia at five times the price.

"The deal is legal, but one which serves as a potent warning to Africa's other gas-exporter hopefuls such as Tanzania and Mozambique to draw up contracts that safeguard their interests even if circumstances change," Reuters reported.

Finally, in August, the BG/Southern Union subsidiary Lake Charles Exports received US Department of Energy approval for a 20-year export plan to ship 2bn cf/d of LNG from its Louisiana terminal.

The next few years will be crucial. New chief executive Finlayson must convince investors he can fill the big shoes left by Frank Chapman, who stepped down last year. Under Chapman's 12-year leadership, BG grew from "a struggling offshoot of a former state company" valued at £9bn, into a FTSE-100 company with a market capitalisation of around £40bn. Today's market cap is still around £40bn; investors will be hoping that is set to rise further.

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