Questor share tip: BG downgraded as Egypt unresolved

BG Group
£11.46+1p
Questor says SELL

THE abrupt exit of a senior board member should always be a red flag for investors and the hurried departure of the chief executive, Chris Finlayson, from gas group BG is no exception. The company may now look to embark on a string of disposals as production continues to slip in Egypt.

When Questor last looked shares in BG Group we said the growth that had justified a premium rating now looked questionable. We downgraded the shares and warned that production doubts would continue to weigh on BG Group. It appears we weren’t the only ones with concerns.

After mounting disquiet from institutional investors and an apparent lack of confidence from the board, Mr Finlayson has tendered his resignation, citing personal reasons.

Alongside his departure, the company added that a deterioration in the Egyptian situation would mean production this year would be at the lower end of the targets at about 590,000 barrels of oil equivalent per day (boepd).

That is a problem for BG because Egypt was BG’s largest-producing country as recently as 2012, delivering 20pc of the company’s total production.

In terms of profitability, Egypt contributed 40pc of the liquefied natural gas (LNG) operating profit and this translates to around a sixth of earnings from continuing group activities, which at full-year were $3.31bn (£2.09bn).

BG Group shares have had a rollercoaster ride in the past 12 months, rising to more than £13 early in the year before slumping to about £10 on production issues. Consensus estimates for the FTSE 100-listed gas group expect full-year revenue of $20.7bn, giving pre-tax profits of $6.51bn and earnings per share around 112c, or 66.6p.

On those estimates, the shares are trading on 17 times 2013 earnings, falling to 14 times next year. That rating is a premium to oil and gas sector peers. Investors have paid such a premium because BG has delivered growth. But given the present disruptions, that still looks expensive.

There may be the opportunity for investors to realise a return from shares as BG offloads assets, with a sale of a stake in Brazilian assets looking most likely. However, the problem for BG is that there are not many buyers for frontier gas resource plays at the moment. We downgrade again to a sell.