RE: investors chronicle22 Mar 2015 09:16
Last year, BG's production profile was improving on the back of the ramp-up under way at its interests in Brazil's Santos Basin. The group has invested over $8bn over the past 20 years in five major pre-salt discoveries in the Santos Basin and 10 blocks in the Barreirinhas Basin. Now, however, it is possible that four offshore oilfield projects in the region will be delayed because of a widening corruption probe into Brazil's state-run oil company Petrobras. The issue looks like it will affect delivery of floating production/storage platforms (FPSOs), thereby delaying a planned increase in output capacity by 600,000 barrels a day (bopd) in the BM-S-11 block south of Rio de Janeiro that was purchased by Petrobras, Portugal's Galp and BG in 2000.
It is still far from cut and dried, but broker Jefferies has just cut its 2016 production estimate for BG by 3 per cent and reduced 2016 and 2017 EPS forecasts by 6 to 7 per cent. The broker's discounted cash-flow valuation has also been cut from 1,215p to 1,150p. In the scheme of things, though, the damage does not look too great and the potential plus point, according to Jefferies, is that "a pragmatic solution likely involves greater use of international contractors which could occur at more competitive costs".
There was better news from BG's operations in Egypt, which have proved to be something of a millstone in recent years. It has been revealed that the energy group has signed a $4bn provisional agreement with two Egyptian state-owned gas companies to supply gas from its West Delta Deep Marine concession. The deal comes on the back of an earlier agreement signed by BG with BP Egypt and RWE Dea to process and transport gas from the two companies' offshore fields in the Nile Delta. At the beginning of last year, BG issued Force Majeure notices under its LNG agreements in Egypt after local authorities had diverted gas to the domestic market, as the country found itself energy-starved in the midst of civil turmoil. As part of the new deal, the Egyptian government is to pay back around $900m it owes BG and enter talks to agree a better price for gas on the domestic market.
Share tip summary
Midway through last year, the IC was negative on BG, but envisaged outperformance to peers over the long run. The group's market valuation is down by a third since then, and we now feel that a value buying opportunity has opened up with the shares' enterprise-value-to-operating-profit multiple compared with peers at a 16 per cent discount to the historic average. There's no doubt that BG remains a mixed bag, but it is now more sinned against, than sinning. With the potential for the group to benefit from any improvement in the oil price as well as its own ramp-up in production, we rate the shares a buy.
Last IC view: Hold, 926p, 4 Feb 2015.
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