bg from beaufort security2 Dec 2014 18:55
Having had deserved hits to the share price with successive profit-guidance misses, the current setback in BG Group is largely attributable to the near 40% fall in the oil price. Attempting to forecast the oil price may be regarded as foolhardy, but the product is so important in the global economy it is important to have a view on where the price is heading.
What we do know is a low oil price leads to cuts in investment in future production - leading to a potential large upswing in the oil price. Note too that this global supply has come from the ‘shale’ revolution, tar sands and very deep water drilling - all very expensive unconventional production. Indeed, with oil below $70 small shale produces in the US will struggle to survive with many potentially defaulting on their loans.
It is important to realise large emerging markets consume half the total of crude output – consumption has outstripped production over many years with the shortfall being met from reserves. The global oil industry has failed to keep up with demand and without a sudden global recession, oil prices will move up and potentially fast and into triple figures again.
Our view: BG Group seems to have acted swiftly in calming down the extensive shareholder questioning and concern regarding the remuneration package of Mr Lund, who was recently appointed as the CEO of the Group. According to the new arrangement, 62% of Mr Lund's remuneration package in the first year will now be subject to performance criteria including total shareholder return, cash flow and efficiency measures. Mr Lund’s pay would also fall within the ambit of the remuneration policy approved by shareholders in May, meaning it will no longer be put to the vote. Nevertheless, what’s more important is that Mr Lund will be joining the BG Group by March and help build the business. Apart from the above, we remain confident of the company’s assets potential, technical expertise and its medium-term growth capability.
We believe BG is oversold and well placed to benefit from any reverse in the oil price. Its assets in Queensland and off-shore Brazil are all on target and are not reflected in the current share price.
We maintain a BUY rating for the stock.
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