Today I am looking at why the risks outweigh the potential rewards at BG Group (LSE: BG) (NASDAQOTH: BRGYY.US).
Production forecasts slashed
I have formerly been a fan of BG Group’s strong production outlook given that its jumbo Queensland LNG asset in Australia, as well as its giant offshore projects in Brazil, are primed to ramp up production over the next year.
However, my faith in the firm was shattered — as was BG Group’s share price — after the oil giant heavily downgraded its production forecasts for this year and next back in January. The company now expects to churn out 590,000-630,000 barrels of oil equivalent per day (boepd) during 2014, while 2015’s guidance was slashed to 710,000-750,000 boepd. Both of these projections are down around 10% from previous broker forecasts.
Troubles across the board
Of particular worry is the breadth of problems which is hampering BG Group’s output prospects. The company has declared force majeure in Egypt — responsible for almost a fifth of group output — due to the ongoing instability there, while rig count reductions in the US and lower production from Trinidad and Tobago is also likely to weigh heavily.
On top of this, the impact of collapsing production, combined with increased royalty payments for its fields in South America, are set to drive costs higher in coming years. BG Group expects unit costs to rocket to $15.50 -$16.25 per barrel this year alone from $12.17 in 2013.
Once bitten. Twice shy?
Of course investing in oil and gas plays are high-risks venture due to the unpredictable nature of both the amount and timing of potential payloads. However, BG Group has a multi-year history of delivering bad news to the market, so investors must weigh up whether the company deserves more of their patience.
Indeed, the prospect of lower production on future revenues could also weigh heavily on BG Group’s balance sheet — and consequently growth prospects — beyond this year and next. Broker Investec believes that “gearing is likely to rise sharply, from 25% at the end of 2013 to 32% at the end of 2014, which may necessitate further disposals.”
