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BG share price drops amid delays and stalling growth

Thanks to project delays, stalling output growth and a steep drop in its share price, despite healthy third-quarter results, the UK company faces its trickiest time yet

Regardless of whether reports in November that BG Group had hired Rothschild and Goldman Sachs to prepare a defense strategy for any hostile takeover are correct, the British gas company is, nevertheless, in a tight spot.

"It is disappointing, but our company has managed to add about 1 billion barrels of resource a year, and that resource resides inside the company," chief executive Frank Chapman told analysts. BG’s reserve replacement ratio has been 200% since 2008, about twice the industry average.

For some, the 21% drop in the share price on 31 October was overdone, but others point out this is actually part of a retreat that began in spring, which has seen the shares fall by over 30% to around £10.60 ($16.86) at the end of November. In the August-November period, BG’s stock hit a fresh 52-week low five times.

"BG is already overvalued and has begun correcting [this]," analysts at the stock valuation company SADIF said. This view is shared by numerous investment banks; Societe Generale, Deutsche Bank and Macquarie cut their ratings on the stock after the third-quarter results, while JP Morgan, Goldman Sachs and others cut their share target prices.

Weak spots

Investors overlooked a 16% rise in adjusted earnings for the third quarter to $1.19bn. Chapman said investors should be encouraged that earnings are growing faster than production – production rose by 5% in the quarter, driving a 13% rise in upstream operating profit to $1.3bn. However, many have begun to question whether BG can deliver on growth objectives from 2014 onwards, which the company insists remain unchanged. BG has a long-term growth target of 6-8% per year to 2020.

BG said a weak 2013 is due to various factors, mostly from the shut-in of the Elgin/Franklin field, in the UK North Sea, and delayed start-up at Jasmine, also in the North Sea. On top of this, there is the company’s earlier decision to scale back US drilling because of low gas prices.

BG said the North Sea field outages represented 30,000 boe/d of lost output. Another 20,000 boe/d will be deferred in Brazil as Petrobras carries out engineering work at the Sapinhoá and Lula NE wells. The US shut-ins represent another 15,000-20,000 boe/d of lost production.

BG has pinned hopes on new projects in Australia and Brazil, which, it says, would underpin total production of more than 1 million boe/d by 2015 and around 1.4m boe/d by 2020.

In 2014, BG plans to install two further floating production, storage and offloading (FPSO) units offshore Brazil and will start the first train of the Queensland Curtis Liquefied Natural Gas (LNG) project. The plant has an export capacity of 4.25m tonnes a year (t/y). Six more FPSOs are planned to come on stream in Brazil in 2015 and 2016, with a tender for a further FPSO for Carioca.

"Critical to our investment proposition is the delivery of our Australia and Brazil ventures. These projects will deliver unit earnings substantially higher than the current group average, which alongside the growing contribution from the expanding LNG business, will result in group earnings growing considerably faster than upstream production," said Chapman.

Yet 31 October brought with it other news that has investors worried. BG announced it has agreed to sell a 40% stake in train 1 of Queensland Curtis LNG to China National Offshore Oil Corporation (CNOOC) for $1.93bn. CNOOC already owned 10% of the first train, with BG holding the remainder, meaning it now becomes a 50-50 joint venture. The heads of agreement (HOA) between the two also includes an LNG supply deal from BG to CNOOC for 5m t/y of LNG for 20 years beginning in 2015, sourced from BG’s global portfolio.

The HOA includes the sale to CNOOC of a 20% interest in the resources of certain BG Group tenements in the Walloon Fairway in Queensland’s Surat basin, increasing CNOOC’s equity from 5% to 25%.

Yet IHS Global Insight, among others, said the deal’s price was too low. This, together with the news of flat production in 2013 was responsible for the size of the share price fall that day.

"Coupled with the CNOOC deal being regarded as low – specifically the future effect on BG’s LNG revenues after selling down its equity – BG’s share price fell on the results," said IHS.

The sale of the Queensland Curtis LNG stake is part of a wider divestment programme designed to reduce BG’s high debt levels. Divestments should release $7.6bn by mid-2013. However, Sam Wahab, of brokerage Seymour Pierce, said in a note that the sudden nature of the latest disposal suggests to him that "it was forced upon them rather than a strategic decision".

At the end of September, BG’s net debt was $10.974bn, up 7% in just three months, with a gearing ratio of 25.3%, high by industry standards. This is especially worrying at a time when the global credit markets are tight.

"The substantial amount of debt that the company [has] could have a major impact on operational performance as a major portion of the company’s earnings would be diverted towards servicing of its debt obligations," warns GlobalData in its SWOT analysis of BG.

"Investors are unaware as to how the company will maintain current earnings," Wahab said. "This is compounded by significant investment in gas-related exploration with diminishing spot prices."

Those low spot prices are a shadow that hangs over gas firms like BG. The growth in US shale-gas production has seen Henry Hub prices plummet from around $6 per million British thermal units (Btu) to just under $3.50/m Btu. This has, however, yet to affect the global LNG market.

While some believe US LNG exports over the long term will total no more than 10% of the global market, it is still one more worry for investors who don’t appear to be giving companies like BG much benefit of the doubt at the moment.

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