Should I Buy BG Group Plc?

I am out shopping for shares again. Should I add BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) to my basket?

Blood and gas

BG Group will be watching the chaos in Cairo with growing unease, because the energy giant has extensive offshore interests in the country. The energy giant already has troubles, its share price is down 11% over the past two years, against a 22% rise in the FTSE 100. Baron Rothschild’s notorious maxim that the best time to buy is “when there is blood on the streets” certainly applies in this case. So should I buy BG Group? 

I have previously bought BG Group on bad news, picking up a chunk in November last year, after management’s admission that it wouldn’t grow in 2013. I knew the recovery would take time, but it has been slow going, the share price is up just 7% since then. Q2 earnings fell 3% to $986 million, while production fell 2%, in line with expectations. The fall was primarily down to lower exploration and production volumes, higher upstream costs and lower oil and liquids prices. The market was expecting bad news. It took the results on the chin.

Two buyers and a seller

Management is hitting project milestones, with a successful start-up in the Lula field, a completion of the Karachaganak shutdown and further exploration success in Tanzania. Chief executive Chris Finlayson said in July that Egypt remains “a primary concern and will continue to be so as the political, social and business environment evolves”. Well, events have evolved, and not in a good way. The market still isn’t too worried, especially since BG’s operations are mostly offshore. But that could change if military aggression turns civil unrest into civil war, or triggers a terrorist response. BG has 20% of its gas reserves in the country.

Management says it is on course to hit its 2013 targets, but has yet to convince the market. Investec recently issued a ‘sell’ notice, citing rising costs and a potential LNG profit shortfall. Yet the broker is in the minority, JP Morgan is overweight with a target price of £16, roughly 36% higher than today’s price of £11.75. Deutsche Bank is a buyer with a £14 target price. So what about me?

Low energy

I have been pinning my hopes on a share price revival in 2014, and I am still hopeful, with this year’s dismal forecast earnings per share (EPS) growth of -4% predicted to turn into 17% in 2014. I’m always happy to give a stock time to recover, but the drawback with BG Group is that you don’t get much reward for your patience, given its current 1.4% yield. That compares to 3.5% for the index as a whole, and 3.1% for the oil and gas producers sector. Covered five times, there is plenty of scope for growth, however, and management acknowledged this by hiking the half-year dividend 10% to 8.51p a share.

Given time, BG Group should reward loyal investors, but there are better opportunities out there. To find out what they are, download our free, in-depth report, Eight Top Blue Chips Held By Britain’s Super Investor.  This report by Motley Fool analysts is completely free and shows where dividend maestro Neil Woodford believes the best high-yield stocks are to be found today. Availability of this report is strictly limited, so download it now.

> Harvey owns shares in BG Group.