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Why BG remains the stand-out play among London blue chips

February 6, 2009

Ten years after the financial restructuring from which it was created, BG Group has notched another milestone: the tenth successive quarter in which the gas explorer’s earnings have beaten City forecasts.

But yesterday’s overshoot was especially welcome at a time when economic weakness in Asia had raised concerns over the strength of its liquefied natural gas (LNG) division. This operation, which has provided the burner beneath BG’s recent growth, has benefited from regional variations in LNG pricing, enabling it to divert cargoes at short notice from Western markets towards those in the Far East where spot rates are higher.

However, the last three months of 2008 proved a record quarter for LNG – operating profits rose nearly threefold year-on-year to £456 million – helping BG’s earnings to beat consensus estimates by 15 per cent. That helps to explain why the company’s fourth-quarter earnings were down just 26 per cent on their predecessor, against the 71 per cent and 49 per cent falls recorded by BP and Shell respectively.

Further, BG has been able to lock in last year’s high LNG rates under long-term contracts, such that 80 per cent of this year’s output and more than 70 per cent of next year’s has been forward sold. If there was a disappointment it was in the exploration and production division, where fourth-quarter volumes fell 4 per cent after temporary shutdowns in Egypt, Kazakhstan and the UK.

But BG reaffirmed its long-term target of raising production at a compound annual rate of between 6 per cent and 8 per cent between now and 2020. Last October’s £2 billion purchase of Queensland Gas – a far better buy than its aborted acquisition of compatriot Origin Energy – should further that aim. So, too, should progress in Brazil, where BG has discovered a net three billion barrels of oil equivalent reserves over the past 18 months. The first production from its deepwater Tupi field, for example, should start to flow next year.

Tempus advised “buy” in October at 803p. At yesterday’s £10.48, up 97p, or 14 times earnings, BG remains the stand-out long-term play among the London-listed leaders. Hold on.

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