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What BG Group plc’s Investment Plans Mean For Earnings Growth

Today I am looking at why I believe BG Group‘s (LSE: BG) is a perilous stock selection.

Capital expenditure on the slide

BG Group’s production outlook continues to provide a serious worry to investors. The oil giant again slashed its production guidance for 2014 and 2015 in January, this time by a tenth and primarily due to operational problems in Egypt. The firm sources around 20% of total volumes from the North African country.

Massive energy shortages there have forced the government into diverting the company’s output straight into the domestic market, forcing BGIMI Group to declare ‘force majeure’ at its projects. As a result, BG Group now expects to produce between 590,000 and 630,000 barrels of oil equivalent per day (boepd) during 2014, and between 710,000 and 750,000 boepd next year.

Reports have surfaced in recent weeks that the firm is planning to cull around a quarter of its global workforce in response to the murky production outlook. According to The Times, BG Group plans to cut 300 head office jobs in Britain, while it is also in talks with its workers in Australia — where it employs 1,000 people across its liquified natural gas (LNG) assets — over possible redundancy packages.

Meanwhile, BG Group has also said that capital expenditure is poised to duck lower in coming years, the firm commenting that it “expects to have passed its peak year for capex.” Although it did not specify exact sums, the firm said that 2014 investment will fall below last year’s $11.2bn outlay, while expenditure during 2015 and 2016 is likely to register between $8bn and $10bn.

BG Group said that it hit all 10 of its key production milestones in 2013, including the delivery of first gas at its giant Queensland Curtis LNG asset and a ramping up of drilling activity at its offshore projects in Brazil. But planned cuts to investment from this year onwards could seriously undermine the firm’s long-term earnings growth.  

A cheap but risky oil play

Due to the firm’s ongoing operational headaches, City analysts expect BG Group to follow last year’s marginal earnings decline with a colossal 13% drop in 2014. A 19% rebound is anticipated next year, however, as output at its major new projects ignites.

At face value these projections leave the fossil fuel specialist dealing at extremely cheap levels. Indeed, a P/E rating of 16.9 for this year falls to 14.1 in 2015, both of which are comfortably below a forward average of 26.8 for the complete oil and gas producers sector.

However, in my opinion BG Group remains a stock pick which is not for the faint-hearted. The firm has slashed its production forecasts numerous times over the past two years which, combined with a planned reduction in capex spend, could take the hatchet to earnings forecasts over the long term.

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Royston does not own shares in BG Group.