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The Pros And Cons Of Investing In BG Group plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

An unpredictable business

The hit-and-miss nature of oil and gas exploration can often lead to severe reverberations in payload forecasts, hampering earnings estimates and often prompting severe reverberations in the share price. Indeed, BG Group suffered such problems last month when recoverable volume estimates at its Carioca field in Brazil were significantly scaled down.

On top of this, BG Group is also having to stomach enduring problems in Egypt, a situation that could lead to a reduction in operations there. Combined with reduced activity in the US and delays to maiden production in Norway, the firm has warned that full-year output could punch zero growth in 2013.

Asset ramp-up rolls on

Still, for the long-term BG Group’s production profile is compelling to say the least, the firm having successfully met all of its major milestones last year.

In particular, the firm remains on course to deliver first production at its mammoth LNG project in Queensland, Australia, during the second half of this year. And in Brazil, gross output at its three offshore vessels at the Santos basin continues to overshoot estimates — these produced 160,000 barrels of oil equivalent per day during July-September — and more assets are ready to hook up in the area in coming months.

Weak dividend yields expected

But due to the capital-intensive nature of its exploration activities, BG Group’s balance sheet cannot currently support meaty dividends at the current time, making it an unappealing selection for income investors.

Even though the firm is expected to shell out full-year payments of 18.8p and 20.6p per share in 2014 and 2015 respectively, up from an anticipated 17.3p for 2013, such dividends would create yields of just 1.5% and 1.6%. This is far below the oil and gas producers sector’s forward average of 3.4%.

Earnings anticipated to explode

The operational difficulties I have mentioned last year are expected to result in a 1% decline in earnings in 2013, according to City forecasts, to 78p per share. But a backdrop of gushing output is anticipated to drive earnings 8% and 27% higher in 2014 and 2015 respectively, to 84.1p and 107.1p.

These projections leave BG Group dealing on P/E ratings of 15.5 and 12.1 for these years, well below a prospective average of 17.9 for the complete oil and gas producers sector. Given the company’s stunning portfolio of assets set to drive volumes and consequently revenues skywards, I believe the oil play is a snip at current price levels.

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> Royston does not own shares in BG Group.