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4 Ways BG Group plc Will Continue To Lag The Oil & Gas Producers Sector

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment. 

Today I’m looking at BG Group (LSE: BG) (NASDAQOTH: BRGGY.US).

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Valuation

First off, BG trades at a historic P/E of 14.8, which is above the oil & gas producers sector average P/E of 12. That said, BG’s closest peers, Tullow Oil (LSE: TLW) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), trade at a historic P/E of 23 and 7.8 respectively, which makes BG’s valuation look relatively average. 

Balance sheet

  Net-debt-to-assets Interest cover by operating profit
BG 17% 54x
Tullow 10% 24x
Shell 5%

Unfortunately, compared to its closest peers, BG has the highest net debt as a percentage of assets. Furthermore, during the past five years, BG’s net debt has ballooned by more than 800%.

Still, during 2012 BG’s interest costs were covered more than 50 times by operating profit, indicating that the company is easily able to finance its growing debt pile. Furthermore, at the end of 2012 the company had more than $4 billion in cash in the bank, more than enough to cover all of its short-term debt falling due within one year.

Company’s performance

  Earnings growth past five years Net profit margin
BG 40% 24%
Tullow 53% 28%
Shell -15% 6%

Despite its debt binge, BG’s earnings growth has lagged that of peer Tullow. Indeed, Tullow has managed to achieve compounded earnings growth of 53% during the last five year without running up a large debt pile like BG.

What’s more, Tullow’s net profit margin is 4% higher than that of BG. Nonetheless, BG’s net profit margin is still 24%, four times greater than that of Shell, an impressive metric considering Shell’s size and position in the oil industry.

Dividends

  Current Dividend Yield Current dividend cover Projected annual dividend growth for next two years.
BG 1.5% 5.0 18%
Tullow 1.0% 3.5 10%
Shell 5.0% 2.5 11%
Sector Average 4.2% 4.2

BG’s dividend payout is penciled in to grow a compounded 18% during the next two years. In addition, BG has the highest dividend cover by earnings in the trio.

Still, BG’s dividend yield of 1.5% seriously lags that of peer Shell and the wider sector. 

Foolish summary

All in all, BG’s earnings growth is relatively slow in comparison to peer Tullow and the company’s debt is growing rapidly. Furthermore, BG’s dividend yield is relatively low for the oil & gas producers sector and peer Shell offers a stronger yield. 

So overall, I feel that BG Group is a much weaker share than its peers. 

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> Rupert owns shares in Royal Dutch Shell.