Can BG Group plc Make £3 Billion Profit?

oil rig

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to push profits up to levels not seen in the last few years.

Today I’m looking at BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) to ascertain if it can make £3bn. 

Have we been here before?

A great place to start assessing whether or not BG can make £3bn in profit is to look at the company’s historic performance. Unfortunately, BG has never been able to make £3bn in profit, the closest it came to this figure was a profit of £2.6 billion back during 2011, BG’s best year to date.  

However, since 2011 things have gone from bad to worse for BG. Indeed, high levels capital spending, volatile LNG markets and most recently, political instability within Egypt, have all been factors that have weighed on BG’s profits during the past year or so.  As a result, the group’s profit for 2013 dropped 50% from the 2011 high to £1.3bn.

But what about the future?

Nonetheless, despite these setbacks, BG is still driving hard for growth and management are upbeat about the group’s future. In particular, management expect that the group will be free cash flow positive by 2015. In other words, BG’s aggressive capital spending programme, which has consumed all cash generated from operations during the past five or so years, is nearly complete and the projects will soon be ready to start generating cash for the company.

Indeed, BG’s flagship LNG project in Queensland, Australia, which has so far cost the company upwards of $20bn is set to start producing LNG by the end of this year. Moreover, the group’s overall production is expected to be in the range of 710,000 to 750,000 barrels of oil equivalent a day, by 2015, approximately 27% higher than 2014’s expected production.

This production boost actually comes at a great time for BG as price of LNG has been surging over the past four or five months, thanks to strong Asian demand. Specifically, a colder-than-expected winter, combined with the continued closure of Japan’s nuclear power capacity has driven Asian demand for LNG through the roof, leaving producers of the super-cooled liquid gas struggling to keep up. As a result, the price of LNG for delivery to Asia has surged to a record high of $20.20 per million British thermal units during the past few weeks.

Further, BG’s capital spending is expected to decline this year and the company is continuing to divest non-essential assets, a quest that has already yielded more than $8bn in cash for the company. 

Foolish summary

So overall, BG is selling off assets and working hard to increase production during the next year or so. In addition, demand for LNG around the world is surging and BG is set to benefit from the demand for the commodity and its rising price.

Based on this combination of factors, I feel that BG’s future is bright and the company can make £3bn profit. 

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In the meantime, please stay tuned for my next verdict.

> Rupert does not own any share mentioned within this article.