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BP Plc vs BG Group Plc: Which Share Will Win The Recovery Race?

Two energy companies, two share-price disasters. Shares in BP (LSE: BP) (NYSE: BP.US) more than halved to a low of £3 following the Gulf of Mexico drilling disaster in spring 2010. BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) suffered a 20% drop in October 2012 after admitting it wouldn’t grow in 2013. I bought both when they were down, both have recovered slightly, both still have a long way to go. Which looks best placed to recover fastest from here?

More than three years after Deepwater, BP is still more than 30% below its pre-crisis peak. That disaster still hangs heavily over the share price, as people whose livelihoods were ruined by the disaster jostle for compensation with a growing line of complainants who suffered no adverse impact whatsoever. BP is struggling to stem the flow of complaints, recently losing its bid to stop compensation payments while allegations of misconduct are examined. This is partly BP’s own fault for agreeing to easy compensation terms, but that’s of no comfort to investors. In the spirit of US legal sagas, this one is likely to run on and on. The BP share price won’t fully recover until it does.

Trouble abroad

BG Group’s problems may pale by comparison, but they also threaten to drag on, with Q2 results showing a 3% drop in earnings to $986m. Revenue and other operating income decreased 6% to $4,361m, reflecting fewer LNG cargo deliveries, a 2% drop in production volumes and lower oil and liquids prices. Investors are worried about BG’s exposure to troubled Egypt, and while its offshore operations have so far continued as normal, there are concerns that more gas may have to be diverted to keep the domestic market happy, reducing LNG exports.

It wasn’t all bad news at BG. Management highlighted strong growth in Australia, Brazil and Tanzania, and felt confident enough to hike the half-year dividend 10% to 13.07 cents per share. But the share price still slipped.

It hasn’t been all bad news at BP, either. A self-proclaimed “strong” first quarter included underlying replacement cost profit of $4.2bn, up from $3.9bn in Q4, comfortably beating consensus expectations. Investors will know more about BP’s prospects when Q2 results are published on Tuesday. The BG Group share price has been the stronger recent performer, rising 9% in the past three months, against just 1% for BP.

BP or BG?

At 11.9 times earnings, however, BP looks better value. Given its ongoing troubles, BG Group seems expensive at 14.1 times earnings, higher than the FTSE 100 average. Despite the recent 10% dividend hike, it still yields still a pitiful 1.4%, notably lower than the index average of around 3.6%, and way below BP, which currently yields 4.7%.

BP’s growth prospects look stronger as well. Earnings per share (EPS) growth is forecast to be 39% this year, and 11% in 2014, putting the yield on a forecast 5.4%. BG Group is still on course for a profitless 2013, with forecast EPS of -3%, although it does rebound sharply to 18% next year, when investors may finally see some rewards for their patience. Income seekers will have to be more patient, however, with the dividend on a lowly forecast 1.7% for December 2014.

Go for growth

Both companies face a long and bumpy road ahead of them. I am confident that BP will enjoy a re-rating, once it finally escapes its legal detours and dead-ends, and you get a chunky dividend while you wait. I am sticking by BG as well, although with less confidence. While I think broker Investec is harsh to label BG a ‘sell’, citing its toppy valuation, I think it looks a little under-revved right now.

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> Harvey owns shares in both BP and BP Group.