Why BG Group plc Is A Bargain

As I’ve learnt the hard way over my business career, not everything can go perfectly to plan all of the time.

Sounds obvious, but sometimes in business your expectations are wrong, reality bites and you must move on and do the best you can with the circumstances you face. Pragmatism is probably the right attitude for coping with such a scenario.

So, when I read that shares in BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) had fallen by 5% following a disappointing production update, I was very interested to find out more.

Indeed, the company announced that it was cutting its production outlook for the next year as a result of delays to new projects in Norway and Egypt.

The cut means that BG Group is now expecting production in 2014 to be lower by around 30,000 barrels of oil equivalent per day (boepd). Although there is no fixed production target for 2014, it is estimated to be around 720,000 boepd, meaning that production forecasts have been cut by roughly 4.1%.

Although this is clearly not great news for the company, I see the share price fall as an overreaction. Certainly, if the forecasts are correct it will mean lower profits, but there is no guarantee that the forecasts will, in fact, remain as they are. Even at 720,000 boepd, this still represents growth of roughly 11% versus 2013 (so long as 2013’s production estimates are met), which is still impressive.

In addition, in my view the key attraction of BG Group is the quality and diversity of its asset base. It operates across the world and has vast potential sitting on its balance sheet. So, even if one year’s production numbers are slightly below forecasts it does not detract from the longer term attraction of the company.

Meanwhile, shares currently offer good value and impressive growth prospects. The price-to-earnings (P/E) ratio compares well to the FTSE 100, being 13.9 versus 15.1, while earnings per share are forecast to grow by 12% in 2014, putting shares on a relatively attractive price to earnings growth (PEG) ratio of 1.16.

So, I’m keen on BG Group as a result of it having a strong and diversified asset base, attractive growth prospects and a share price that is relatively cheap compared to the wider stock market.

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> Peter does not own shares in BG Group.