MENU

Why I’m Keeping Faith With BG Group plc

BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) tried the patience of its shareholders again this week with a surprise profit warning that knocked 15% off the shares. After a similar incident in October 2012 — and several revisions of production forecasts in the meantime — the group is acquiring a reputation for unreliability.

That’s unfortunate for a company that was a successful high-growth story, and which still has great long-term prospects. It highlights the risks inherent in the oil and gas sector — and what investors must do to protect themselves.

Egypt

The main problem that has hit BG’s production levels this time is the political situation in Egypt. The government has diverted natural gas to the domestic market, so BG has been forced to declare ‘force majeure’ and renege on its obligations under export contracts.

Political risk is an occupational hazard for natural resource companies — the UK energy companies have recently found that you don’t need to go overseas to suffer from it! The warning signs were there: Egypt makes up around one sixth of BG’s production, and the political turmoil has been evident. BG had previously warned that production was being diverted, and debts outstanding from the government had grown an alarming amount — that’s still a cause for concern.

But BG’s shares might have suffered a less-worse fate if expectations had been guided down earlier, rather than waiting for force majeure to be declared. The same applies to the other reason for the profit warning: the softening of US gas prices, which has reduced the volumes it’s economic for BG to produce.

Cash flow

This is disappointing, particularly after new CEO Chris Finlayson laid out a strategy last year that emphasised ‘monetising’ BG’s exploration assets faster. Though BG still expects to meet its goal of turning cash flow positive from 2015, partly through reduced capex, investors have to wait longer for the group’s exploration successes to be turned to cash.

Nevertheless, the big future opportunities — BG’s big position offshore Brazil and its LNG business in Australia — are still there. Each has its problems — in Brazil, BG is dependent on operator Petrobras, while costs are rising in Australia — but if BG gets them right the premium rating it used to enjoy will be restored.

There’s reason to be optimistic that short-term problems in Egypt might ease, too. Interim president Mansour has decided to hold presidential elections later this year and investors might hope that army leader General Sisi, widely tipped to win, will be concerned to maintain the country’s international standing.

Lesson

The lesson for investors is that the best way to mitigate risk is to diversify. Managing a portfolio to grow your wealth takes more than just good stock-picking. For some useful insights into how to grow your wealth reliably, I recommend you take a look at 'Ten Steps to Making a Million in the Market'.  It's an exclusive report from the Motley Fool that you can have delivered straight to your inbox. Just click here -- it's free.

 > Tony owns shares in BG Group but no other stocks mentioned in this article.