BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) shareholders got a bit of a shock at the end of January from a warning that 2014 production is going to be lower than previously expected. Instead of the 660,000 barrels of oil equivalent per day (boepd) forecast by analysts, we’re now only likely to see 590-630,000 — and 2015 guidance has also been downgraded, from 800,000 boepd to 710-750,000.
Results
Then this week we saw BG’s full-year results, which told us that Business Performance (adjusted for disposals, impairments and revaluations) operating profit is down 5% to $7.6bn with similarly-adjusted earnings per share (EPS) flat — though total unadjusted EPS slumped 33% to 64.8 cents. The total dividend was lifted by 10% to 28.75c (18.02p) per share.
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The share price plunged in response to the original warning, but it rebounded a little after the results to around 1,050p — that’s a fall of 23% since January’s highest price of 1,356p.
The future
Why do I think the rest of 2014 will go no better? Let’s start with a look at BG’s last five years of headlines and forecasts for two more:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2009 | 100.9c | -32% | 18.1 | 19.63c | — | 1.1% | 5.1x |
| 2010 | 118.7c | +18% | 17.8 | 21.60c | +10% | 1.0% | 5.5x |
| 2011 | 125.4c | +6% | 17.9 | 23.76c | +10% | 1.1% | 5.3x |
| 2012 | 129.4c | +3% | 12.8 | 26.14c | +10% | 1.6% | 5.0x |
| 2013 | 128.6c | 0% |
16.5 |
28.75c | +10% | 1.4% | 4.5x |
| 2014* | 116.0c | -9% | 14.4 | 30.00c | +4.3% | 1.8% | 3.9x |
| 2015* | 143.0c | +24% | 11.7 | 32.30c | +7.7% | 1.9% | 4.4x |
* forecast
Forecasts for 2014 are all over the place at the moment, so we’ll have to wait for things to settle.
But why don’t I think BG shares are set for a rebound? Well, even with the price fall, they’re simply not looking oversold to me — those forward P/E ratios are still significantly higher than BP (10.5, dropping to 8.7 for 2015) and Royal Dutch Shell (around 10).
Of course, BG has its liquified natural gas business in addition to its upstream oil & gas exploration, and that’ll be considered less risky by investors and may justify the higher P/E. But let’s look in a little detail at the actual warning…
The problems
The key highlight is that Egypt has diverted more of its gas production than had been agreed to domestic use, and BG has had to declare force majeure on some of its own contracts to supply the stuff (that is, it cannot fulfill them for reasons unavoidably beyond its control).
But that’s not the entirety of it — BG also told us of year-on-year production decline in the US from 2013 to 2014, and that might have escaped some people’s attention.
There’s also the popular fear that warnings tend to come in bunches, and the recent revelations did follow on from a disappointing third-quarter update in October 2013 which revealed a 15% fall in operating profit with production down 10% — and even then, BG knew of problems in Egypt.
Tough year
BG will bounce back in the long run, I’m pretty sure. But 2014 looks like it’s going to be a tough year, and I just think there are better places for our money in this sector — BP and Shell are both looking better value to me, and if it’s dividends you’re after then there are far superior income-providers out there.
