Is BG Group plc Now Cheap Enough To Buy?

This week saw BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) issue a profit warning and cut its production forecasts, for the second time in two years.

The news instantly wiped about 15% — all of last year’s gains — off the oil and gas group’s share price, leaving it back where it was after the firm’s last profit warning, in October 2012. However, I think it might be time to take a closer look at the firm’s shares — and perhaps consider adding some to my portfolio.

Bad news already priced in?

I’ve long thought that BG Group has been overpriced, and I steered well clear of the firm’s shares when they were trading at 1,200p and above, as they did for most of 2011 and 2012. However, below 1,100p, BG starts to make more sense.

The firm expects to have a torrid 2014; lower production in Egypt and the US, combined with continued investment in Brazil and Australia, means that the firm expects production costs per barrel of oil equivalent (boe) to rise from $12.17 in 2013 to $15.50-$16.25 in 2014, cutting into its profits.

However, all of this bad news is now out in the open — and in the firm’s share price — ahead of next week’s full-year results.

Good assets, bad management?

BG didn’t issue this week’s update because it wanted to rush to share new information with its shareholders — it issued it as late as possible before its results announcement, to avoid giving the City a nasty surprise on 4 February.

This doesn’t reflect well on BG’s board, in my view, but it doesn’t detract from the quality of the firm’s assets. BG expects to report production of 230.9 million boe for 2013, with a bias towards liquefied natural gas (LNG), for which global demand is strong.

The 15% decline takes BG’s share price back to levels last seen 15 months ago, but the firm’s flagship Brazil and Australia projects —  which will drive future production growth and cash flow generation — are now much more advanced than they were in October 2012, and are entering the early stages of production.

In my view, this could make the firm an attractive takeover target, especially for a large, Asian state-owned oil company, which could retain these key LNG assets to guarantee future domestic supplies, while selling BG’s other oil and gas assets to recoup some of its outlay.

Is BG's dividend safe?

BG shares trade on a trailing dividend yield of 2.2%, but analysts' forecasts suggest that the firm's payout may fall by 23% this year, giving a prospective yield of just 1.7%.

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> Roland does not own shares in BG Group.