How Will BG Group Plc Fare In 2014?

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at gas and oil exploration and production company BG Group (LSE: BG)  (NASDAQOTH: BRGGY.US).

Track record

With the shares at 1078p, BG Group’s market cap. is £36,751 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue ($m) 12,566 15,441 17,166 17,667 18,933
Net cash from operations ($m) 4,391 5,532 6,386 6,982 7,995
Adjusted earnings per share (cents) 91.6 100.9 118.7 125.4 129.4
Dividend per share (cents) 11.23 19.63 21.6 23.76 26.14

1) Prospects

A string of positive announcements since BG’s three-quarter update in the Autumn has just been over shadowed by a negative one snappily entitled ‘BG Group Declares Force Majeure in Egypt’. That was enough to sink the share price by 16% on the day.

With more gas going to Egypt’s domestic market than was agreed, there’s less gas available from Egypt to drive the firm’s operating profit for 2014. That, and lower gas prices during 2014, means earnings will miss expectations this year. BG Group reckons it is committed to the Egyptian LNG Project and will continue to negotiate with the Egyptian authorities and other stakeholders to seek a long-term solution. The CEO reckons volume decline in 2013 and 2014 is being driven by both operations in Egypt and the US, with the rest of the firm’s business flat overall.

Yet BG has a great track record, performing well since the mid-nineties with 15 big discoveries around the world adding an average 1 billion boe (barrels of oil equivalent) to its resource reserves every year for a decade. Indeed, in a measure of undisputable growth, the reserves replacement ratio ran at almost 200% over the period and reserves now stand at about 18 billion boe.

That’s history now, of course, but it’s just possible that current short-term challenges could provide something of a buying opportunity to boost total returns for BG Group investors for 2014 and beyond.

2) Risks

Perhaps the biggest risk is that BG could find itself caught up in some BP-style operational disaster like the one experienced in the Gulf of Mexico in 2010. We should never forget that the company’s activities are inherently dangerous.

As a commodity company, BG has limited pricing power.

Both the above risks mean that companies like BG Group ‘should’ trade at a discount to some other types of business. If the P/E rating gets too high, it might be worth reviewing any investment in BG Group.

3) Valuation

Expected earnings for 2013 cover the dividend about 4.5 times, which suggests the firm sees forward growth opportunities as a better investment to reward shareholders than returning cash through the dividend. The dividend yield is running at about 1.6% and investors can buy into the company for a P/E multiple of around 14 based on 2013’s likely full-year results, due around 4 February.

What now?

Looking at that dividend yield, if you are attracted to BG Group then it’s probably for its growth prospects rather than its income prospects. That’s what I look for with my stock-market investing too: growing businesses and share-price appreciation.

That's why I'm thinking big while investing small and hunting for bargain opportunities under the city's radar. There's no doubt that, potentially, better returns from stock market investing can be generated by searching for smaller companies with more room to grow. To me, that means looking at firms too small to qualify for a FTSE 100 listing.

If you feel the same, you'll be interested in reading a Motley Fool report called Ten Steps to Making a Million in the Market. To get your copy, click here.

> Kevin does not own shares in either BG Group or BP.