Which blue-chip oil and gas explorer should you buy today?
In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.
In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up the most points at the end of the contest.
Stepping into the ring today are blue-chip oil and gas explorers BG Group (LSE: BG) (NASDAQOTH. BRGGY) and Tullow Oil (LSE: TLW).
BG and Tullow have under-performed the FTSE 100 over the past six months. The Footsie is up 5%, while Tullow is down 2% and BG has lost a whopping 21%, largely as a result of a recent warning that it expects no production growth in 2013.
Let’s take our seats at ringside.
Round 1: earnings
| | BG | Tullow |
|---|
| Recent share price | 1,007p | 1,364p |
| Last year price-to-earnings (P/E) | 12.0 | 29.2 |
| Current year forecast P/E | 11.8 | 26.5 |
| 4-year earnings per share (eps) compound annual growth rate (CAGR) (%) | +12 | +51 |
| Current year forecast eps growth (%) | +1 | +10 |
| Forecast operating margin (%) | 37 | 50 |
Source: Digital Look, Morningstar, company reports. Winners in bold.
BG starts strongly, taking big points on P/E. But Tullow hits back scoring equally hard-hitting points on earnings growth. Tullow edges the round by taking the final point for its superior operating margin.
Round 2: dividends
| | BG | Tullow |
|---|
| Last year dividend yield (%) | 1.5 | 0.6 |
| Current year forecast dividend yield (%) | 1.6 | 0.8 |
| 4-year dividend CAGR (%) | +12 | +19 |
| Current year forecast dividend growth (%) | +9 | +30 |
| Forecast dividend cover | 5.3 | 5.0 |
Source: Digital Look, Morningstar, company reports. Winners in bold.
It’s a similar story in round two. BG starts strongly, taking points for yield, then Tullow hits back scoring on the growth measures. This time, though, BG edges the round for its slightly more conservative dividend cover.
Round 3: balance sheet
| | BG | Tullow |
|---|
| Price/Book (P/B) | 1.8 | 4.1 |
| Net gearing (%) | 39 | 59 |
Source: Digital Look, Morningstar, company reports. Winners in bold.
BG finishes with a flourish, taking both points in the final round, giving it a two-rounds-to-one victory. The overall points tally is BG seven and Tullow five.
Post-match assessment
Mega-cap oil majors Royal Dutch Shell and BP are on markedly lower P/Es and higher yields than BG and Tullow. The higher rating of the latter pair is down to their stronger historical growth records and potential for future growth. While BG and Tullow aren’t exactly small, it’s easier to envisage them doubling their market capitalisations than it is to envisage Shell and BP doubling theirs.
BG’s recent heavy share-price fall has seen its P/E drop well below its historical average, although the dividend yield remains significantly lower than that of the market as a whole. Tullow, in contrast, remains very highly rated.
Not surprisingly, then, BG takes all five points on the ‘value’ measures I use in these head-to-head contests. Weighing against that is Tullow’s very strong growth ratings.
However, BG’s recent history shows what can happen when a very highly-rated share disappoints the market with a warning that growth in the short term will be lower than had been expected.
For investors with a long-term horizon, BG looks quite attractive at its current price, while Tullow -- perched on its vertiginous rating -- will have to keep delivering blockbuster growth just to keep the market moderately content.
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> G A Chester does not own shares in any of the companies mentioned in this article.
