Is Now The Right Time To Buy BG Group plc?

BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) announced a $5bn pipeline sale this morning, which should earn the firm a $2.7bn profit — but the market still wasn’t impressed.

One problem, of course, was that some bitter medicine was mixed in with this sweet treat.

The pipeline is part of BG’s $20bn Queensland LNG project, which is due to start LNG shipments next year. However, BG said this morning that its other QCLNG assets will be written down by $2bn, suggesting that the project may not be as profitable as expected now that oil prices have fallen below $70 per barrel.

BG also said that its long-term price assumptions and business plans were now under review, given recent falls in commodity prices.

The fact this review was mentioned in this morning’s announcement suggests that there will be more bad news, which we will learn about when the group publishes its full-year results in February.

After rising briefly this morning, BG’s shares drifted lower, and were down by around 1% at 890p by early afternoon.

What should investors believe?

The majority view of BG Group is that it is nearing the end of a long period of underperformance, and that cash flow and shareholder returns should start to improve in 2015/16.

That’s certainly the City view: according to Reuters, 15 of the 28 analysts who cover BG have some kind of buy rating on the stock, with a further eight citing it as a hold. This suggests that BG’s share price is expected to rise over the next year or so.

What do the numbers suggest?

Today’s announcement contains one clear piece of good news: the $5bn pipeline sale will significantly reduce BG’s debt levels and gearing, strengthening its balance sheet and reducing the risk of a credit rating downgrade, which would increase BG’s borrowing costs.

On the other hand, BG trades on a 2015 forecast P/E of 14 and offers a prospective yield of 2.5%. That’s not cheap — unless we can expect substantial earnings growth in 2016.

My view

I rate BG as a hold.

The shares may drift a little lower, but I think that the downside of lower oil prices will gradually be offset by falling expenditure and further asset sales.

I believe 2015 should be the turning point for BG — and 2016 could be pretty good, especially if oil prices have started to recover by then, as I expect them to.

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BG's dividend cover has remained strong in recent years, and I expect payments to increase over the next 2-3 years.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.