Reading through the list of major natural resource players, nearly all of them have one thing in common: country-specific risk. Indeed, the likes of Royal Dutch Shell, BP and BG Group (LSE: BG) (NASDAQOTH: BRGGY.US) all have assets in countries that are generally viewed as being higher risk than many developed countries.
Indeed, even if such companies operate in what are considered to be ‘less risky’ countries, they can still run into severe difficulties. For instance, BP’s Deepwater Horizon tragedy occurred in the USA and it now appears as though the payouts are not being handled in a fair and proportionate manner.
So, risk is the name of the game for natural resource companies such as BG Group.
Of course, the situation in Egypt is exceptional and shareholders in BG Group should be well-aware of the situation. Indeed, the company is monitoring events closely because 12% of its net assets are located within Egypt and it continues to invest relatively heavily in the country. Furthermore, receivables due from Egypt total $1.3 billion, with overdue payments standing at $0.6 billion (which equates to around one-eighth of annual net profit).
Clearly, BG Group is hopeful that the situation in Egypt stabilises. However, there is another 88% of the business that continues to offer a diverse group of high-quality assets located in five different continents across the globe. Even if BG were to write-off its Egyptian operations (which is unlikely), it has the financial muscle to survive and to prosper in other parts of the world.
Of course, its current price-to-earnings (P/E) ratio is not hugely attractive. BG Group currently trades on a P/E of 13.8, which is in line with the wider market (the FTSE 100 trades on 13.7) but is at a substantial premium to its sector (oil and gas producers) where the P/E is just 9. The reason for the premium is not only the diverse and high-quality asset base, but is growth prospects; analysts are forecasting that earnings per share will increase from 80p in 2013 to 120p in 2015.
So, while the unfortunate situation in Egypt may cause volatility in BG Group’s share price in the short term, it continues to offer growth at a reasonable price for medium- to long-term investors.
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> Peter owns shares in BP and Shell but does not own shares in BG Group.
