BG (LSE: BG) shares surged more than 3% in early trade on Thursday in the wake of upbeat second-quarter results for the oil-and-gas behemoth. They have pulled backed a bit since: they still offer value at 1,203p, where they currently trade. Centrica (LSE: CNA) also reported on Thursday: however, I wouldn’t touch it.
BG: 2Q/1H Results
At BG, operating profit ($1.9bn) is up 11% in the second quarter versus the second quarter of 2013. Net income for the period stands at $1.2bn, or 30% above consensus estimates (+23% year-on-year).
Net income ($2.3bn) for the first half of 2014 is up 9% year-on-year. BG’s cash flow from operations in the first half of 2014 is only marginally higher than in 2013, but its negative free-cash-flow stands at $-354m, which is a clear improvement on H1 2013. Net debt is down by almost $800m to $10.3bn. If targeted divestments are executed at the right price, BG will outperform rivals and the broader market, in my view.
While some analysts have argued that “the deferral of maintenance shutdown activity in the UK” will impact earnings in the second half of 2014, I believe BG is a defensive play in the current market environment. That’s reflected in its performance on the stock exchange. The FTSE 100 index is down 0.35% at the time of writing, while BG stock is still up 2%.
A decent set of results will fuel speculation that BG could soon become a palatable candidate for a break-up or a takeover. Rumours have been swirling around for ages, and have come back with a vengeance since June. BG is a restructuring story that could offer plenty of upside, even if it continues to operate as a standalone entity. It must be quick to appoint a new boss, however.
I don’t believe a change of ownership is on the cards. As I recently argued, BG is too big to be acquired, unless BG itself decided to announce targeted spin-offs and/or a consortium launched a bid with the intention to separate LNG assets from BG’s upstream operations.
Centrica, oh Centrica…
Elsewhere, Centrica shares dropped 1% on results: will further weakness in its stock price entice potential suitors?
The British Gas owner has been rumoured to be a target for Qatari investors, who are considering partnerships and investments, but opportunistic buyers will likely wait for a lower valuation to show before making a move. Centrica shares are expensive right now.
Centrica said that the first half of the year has “seen challenging market conditions” across the group, both as a result of “the weather” and “reflecting the wider political environment”. I don’t think public companies should blame the weather for their woes, particularly when operational and financial hurdles are apparent.
Centrica’s H1 adjusted operating profit is down 35% to £1bn from £1.5bn from the previous year. In spite of a lower tax rate, earnings per share are down 29% year-on-year. Centrica is the worst performer of all the utilities in the UK, and its shares could easily decline in weeks ahead.
Non-core asset disposals, including UK CCGTs and Ontario home services, and “potential releases of capital from gas assets in Trinidad and Tobago and our UK operational wind portfolio”, are expected to fetch about £1bn, Centrica said. I think management are way too optimistic on this front.
Centrica expects “to complete (its) £420m share repurchase programme” in the second half of the year, so Centrica shares won’t find any support in similar initiatives, because the company doesn’t have the financial strength to launch buybacks in the near future. Centrica’s net leverage is lower than that of sector’s rivals, but is rising fast, and its cash flow profile is problematic.
A further drop in profitability, and Centrica will lose its coveted credit rating. Finally, Centrica’s working capital management is another massive issue — one bigger than the mild weather in the UK.
