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The Surprising Buy Case For BG Group plc

Today I am looking at an eye-opening reason why shares in BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) should recover strongly after recent weakness, as the firm’s long-term production picture still provides a compelling investment case.

Production volumes still expected to surge from 2015

Shares in BG Group have taken a tumble since the firm warned in September’s operational update that production in 2014 is likely to suffer a setback. In particular, continued social and political upheaval in Egypt is likely to push back first output at its West Delta Deep Marine project into later into the year.

Elsewhere, maiden production at its Knarr asset in Norway is likely to be delayed until the second half of next year, the firm said, which — combined with reduced output in Egypt — will result in a reduction of 30,000 barrels of oil equivalent per day (boepd). Elsewhere, a weak natural gas price will see BG Group operate less rigs in the USA in 2014, resulting in a 17,0000 boepd reduction in overall volumes.

Still, I believe that the long-term growth story remains in tact owing to the strength of its core assets, and the company’s 2015 guidance of between 775,000 and 825,000 boepd remains unchanged. First production from its Queensland Curtis LNG project in Australia, a major future earnings driver, is still estimated for the turn of the year. And operations in Brazil continue to gather pace, with more floating production, storage and offloading (FPSO) vessels due to hit the area soon.

Production hiccups are not uncommon amongst oil and gas producers, and in this regard I believe that BG Group offers excellent value for investors. A forward reading of 15.6, based on Investec earnings projections, is bang in line with the wider industry average. But surging volumes from 2015 onwards look set to thrust earnings higher.

Although September’s update shook confidence in production growth estimates — Investec cut its 2014 outlook by 5% — output of 668,000 boepd next year represents healthy growth of 2.8% from 2013 considering the problems outlined. And production is still expected to rocket higher from the end of next year, with a 14.5% advance pencilled in for 2015 to 765,000 boepd, and an additional 13.2% in 2016 to 866,000 boepd.

Drill for riches with the Fool

So although production growth, and consequently earnings advances, are likely to remain constrained in the medium term, I believe that BG Group remains well positioned to realise smashing expansion over the longer term as payloads from its rich oil assets are ramped up.

But I have explained, the company -- like all natural resources plays -- comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a 'hit and miss' business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

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> Royston does not own shares in BG Group.