US Edition BG Group
£10.18 -19p
Questor says BUY
Companies that can snap up assets cheaply in the downturn will emerge strong the other side and on Tuesday BG group made a wise acquisition, entering a new market close to the bottom of the cycle.
The shares are a long-term core energy holding and the stance remains buy. BG is also one of Questor's tips of the year.
BG will pay US group Exco Resources Inc $1.3bn (£784m) for a 50pc interest in a shale gas joint venture. Exco will contribute 120,000 acres of land in the Haynesville shale gas area in Texas and Louisiana, plus its associated gas infrastructure. The company, which has extensive shale gas experience, will still be the operator of the field.
The deal is important because it marks the entry of BG into the shale gas arena. It is also a good time to make this move as gas prices remain weak and have not risen over the past few months like oil prices.
Indeed, the outlook for US gas prices in the short term is downbeat, but over the long term the gas price is likely to rise from the current distressed level.
Shale gas has become increasingly important, as the many deposits could be the largest single source of recoverable gas in the US. Indeed, last year the chief executive of US energy group Chesapeake said that shale gas in the US could potentially provide America's gas needs for the next 100 years.
Of course, the process is much more complex than tapping normal gas reservoirs, but the demand for energy is such that unconventional sources have now become more economic.
The gas is extracted from relatively low permeability rock and drilling the wells for this is expensive. That is the likely reason Exco needs a partner. However, the wells tend to have long production lives.
BG says that the venture will add 2.6 trillion cubic feet of gas to BG's resource base. This is significant, as it represents almost 5pc of its current resources base.
Current production is 78m cubic feet per day, but this is expected to rise to 250m cubic feet per day by 2012.
The venture is unlikely to boost the bottom line overnight, but it is a strategic and sensible long-term purchase in a growing market. It will also bring new types of skills into the group's operation and help it with its strategy to source gas all over the world and sell it into markets where prices are higher.
Recently, Daniel Werner, the general manager of BG's Singapore liquefied natural gas (LNG) unit, said that there was an oversupply in the LNG market, leading to a temporary buyers' market. This is not really a concern for BG.
Peak gas production from BG's new resources will not start until 2014 – and that is likely to be when demand recovery will really kick in as the global economy rebounds. Also, the company locked in gas prices last year on contracts to protect it from falling LNG prices.
BG is also regarded as a perennial bid target, but it is the growth prospects of the group in Australian LNG, its assets in offshore Brazil and now US shale gas that are the real reasons to own the shares. The shares are trading on a December 2009 earnings multiple of 14.3 times, falling to 12.6 in 2010. The dividend yield is just 1.1pc so
this is not a play for income-seekers. Buy.
Hargreaves Services
490p +8 ¾
Questor says BUY
Haregreaves Services shares have been very volatile – and they are still below Questor's recommendation price of 542½p. However, Questor is still of the view that the shares are overvalued and the stance remains buy.
The company is, among other things, the operator of Maltby Colliery in Yorkshire. It also offers a whole integrated supply chain in the coal industry.
Hargreaves mines the coal, transports it to power stations through its fleet of more than 500 vehicles and even removes the ash after the coal has been burnt and turns it into materials that can be used for footpaths and even speedway circuits.
In February 2007, Maltby signed a new three-year contract to supply the giant Drax power station, which accounts for approximately 60pc of its coal production.
Net debt at May 31 was slightly lower than market expectations at £69.2m. In the energy and commodities division, the UK operations continued to perform very strongly with profits and volumes ahead of internal expectations, however, volumes in Europe were low.
The company also said it was looking for opportunities to deploy its strong operating cash flow to accelerate growth and investment. These opportunities in the short term will focus on coal operations, renewables and further strategic investments at Maltby.
Yesterday's trading update confirmed that, for the year ending May 31, numbers were in line with expectations. The company should also benefit from a move to the main index from Aim in the next nine months, as the shares will be institutional investors' radar.
The company is also expected to grow profits by 20pc in 2010, so its rating looks very low. The shares are trading on a lowly May 2009 multiple of 6.6 times, falling to 5.9 times in 2010.
Coal will be an integral part of our energy future, with the Government's support of "clean coal" underpinning the industry. The shares are a buy.