BG Group has long-term growth potential.
BG Group (LSE: BG) set a new 52-week high at the end of last week, and is up over 20% over the same period.
With new discoveries announced in Brazil, China and Tanzania this month, the company remains confident of continued growth for the next decade.
Its core activities are the exploration, production and supply of natural gas. It derives the bulk of its operating profit from two main divisions: exploration and production, and Liquefied Natural Gas (LNG).
Exploration and production
The exploration and production activities delivered over half the $5.1bn operating profit in the nine months to 30 September 2010. The four most important areas of operation account for nearly 80% of production.
In descending order they are:
- Egypt, where about a quarter of 2009's production originated. BG has two concessions in the Nile Delta and accounts for 40% of Egypt's domestic consumption of natural gas;
- The UK, a mature field, though production on the Continental Shelf is expected to continue at current levels until at least 2014;
- Kazakhstan, where BG has a 32.5% stake in a joint-venture with ENI which is apparently under some pressure to sell a stake to the Kazakh state producer. Political risk is an ever present factor for the oil and gas industry; and
- Trinidad and Tobago, where two thirds of production is exported as LNG.
Other significant producing areas are India, Tunisia, Australia and Bolivia.
BG operates plants to liquefy natural gas, and to re-gasify the resulting LNG. It also runs a fleet of around 30 LNG tanker ships, andis involved in marketing and managing LNG deliveries for double the volume of gas which it produces itself.
The company has liquefaction interests in Egypt and Trinidad and Tobago, imports approximately 40% of the LNG delivered in the US, and is a 50% shareholder in the UK's LNG terminal at Milford Haven.
BG is planning its biggest ever investment, $15bn, to develop an LNG project in Australia which will have an annual capacity equivalent to 10% of UK gas demand. The plant will be the world's first to produce LNG from coal bed methane and will mainly be exported to China and other Asian countries. BG is contracted to supply approximately 8% of China's annual demand.
Together, these activities fit BG's stated strategy of delivering low-cost gas to high-value markets. BG has historically been in the best quartile in a peer group comparison of finding and developing costs, with annual operating costs superior to the best quartile average (according to its own analysis).
At the end of 2009, BG's replacement reserve ratio was comfortably ahead of 100%, meaning that new reserves were being added faster than reserves were consumed. Proved reserves were up 19% over one year and 32% over three years, excluding purchases and sales.
Brazil, the US, Australia and the UK are the four main focuses of BG's capital expenditure. Production from Brazil commenced during the year.
The balance sheet is healthy, with gearing at 22% at the end of 2009. Cash flow from operations is strong, 94% of operating profit, but is all consumed by capital investment which is running at around $8bn per year.
The dividend yield is under 1.0%, but covered 5.5 times. The company is not without earnings, but is reinvesting.
Further downstream, the strategy seems less coherent. Nevertheless it has some interesting transmission and distribution assets in key emerging markets.
In Brazil it owns 60% of Comegas, the gas distributor for the Sao Paolo region, and in India it owns 65% of the Gujarat Gas Company and just under 50% of the gas distribution business in Mumbai.
During the year, the group disposed of most of its power generating operations in the UK, US and the Philippines.
Emerging market demand -- and OPEC -- have ensured relatively high and stable oil and gas prices. The company has already secured the reserves to deliver its targeted 6-8% compound annual growth in production, a demanding target for a company the size of BG.
Its LNG activities provide a second strand to earnings not dependent on exploration success. LNG demand is forecast to grow by 12% annually for the next two years at least. It is a low carbon form of energy which, almost uniquely, can be transported globally.
New technologies to recover shale gas have boosted supplies of natural gas, especially in North America, but the ability to switch markets is a mitigation against oversupply.
On a PE of 19.7, BG's shares are priced in anticipation of growth. But it has the wherewithal and ambition to deliver.
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Tony has shares in BG Group.