US Edition BG Group
£10.95 -37½
Questor says BUY
BG Group shares are trading at a high valuation already, but the company was one of Questor's star picks for 2009 and it still offers a relatively safe home for your cash.
Despite the fact that gas prices have fallen 62pc and oil prices by 41pc compared to last year, BG is well-placed for when demand inevitably picks up again.
The numbers released yesterday were reassuringly solid, slightly beating analyst expectations. Third-quarter pre-tax profits fell 45pc to £838m on the lower commodity prices, but production was up 5pc to 56m barrels of oil equivalent per day and rising.
One project in Tunisia has been delayed but over the next quarter production levels are expected to be around 700,000 barrels per day, up 12pc on the fourth quarter of last year.
BG Group's potential for growth is its most attractive quality. Its recent oil discovery at Guara off the coast of Brazil was materially larger than even BP's "giant" Tiber prospect, with a floating facility due to start work in 2012.
The Brazilian Santos Basin area, where BG has a very strong presence, has provided the largest hydrocarbon discovery in the world for 30 years.
BG has a 30pc stake in the Carioca field, which could contain up to 33bn barrels of oil equivalent. News flow from this location has supported the share price throughout 2009 – and there ought to be more updates in the same vein next year.
Part of the company's strength lies in its mix of long-term supply contracts negotiated when energy prices were higher and more flexible liquefied natural gas (LNG) shipments, leaving it able to divert supply to markets where there is a premium.
In its quest to become the world's third-largest supplier of LNG, the company entered the Australian market with its Queensland Curtis project, where it expects coalbed methane production to come online by 2014.
It is also taking an interest in US shale gas, where there is huge potential to supply the domestic American market through existing infrastructure.
There is lots of talk about falling North Sea gas production but the group's operations in this area are expected to be flat or better all the way to 2015.
There are still risks. Some analysts, including a group from Morgan Stanley, believe there is a threat of a price collapse in the gas market and no one is quite sure when demand might pick up again following the recession. It is difficult to predict how far Western industrial demand will ever recover but BG is in a good position to take advantage of the inexorable thirst for oil and gas likely to come from China and other emerging markets in Asia.
Despite the difficult market backdrop, BG Group's presence in LNG and offshore Brazil means it is operating in growth markets.
Questor feels an investment is fairly secure. Buy.
GlaxoSmithKline
£12.51p -5½
Questor says BUY
Andrew Witty said the “dynamics of GSK’s business are changing” as Britain’s largest drug company reported third-quarter results. Since taking charge of the business from JP Garnier in May 2008, after years of a stagnating progress for the shares, he has made much of moving away from a focus on “white pill/western markets”.
Yesterday’s quarterly figures were effectively the first time that the results of this long-term project began to emerge. Revenues rose for the first time since the second quarter of 2007, excluding the impact of sterling’s demise, despite sales in the key US pharmaceutical market falling 12pc. Growth was driven by emerging markets, up 25pc, and consumer healthcare, up 8pc.
Alongside this were also the benefits of the swine flu pandemic. These include £182m of third-quarter sales from anti-viral Relenza and analysts’ forecast of £1bn of sales from swine flu vaccine Pandemrix for the fourth quarter.
Questor believes investors looking to grab the benefits of this boost have largely missed their chance. GSK shares have rallied by 27pc from a low of 987p on April 23 and the fear now must be of profit-taking as the company’s results begin to reflect its investments in developing pandemic products.
GSK’s shares are trading at 10.5 times earnings and yielding 5pc, slightly expensive when compared with AstraZeneca’s 7.9 times earnings ratio.
However, Questor believes GSK is an attractive play for other reasons. Not only is the world’s third-largest drug company a useful defensive play when economic outlooks remain fragile, but GSK looks cheap in historical terms.
The company is in transition and that spells opportunities for investors, especially given the early signs of success in Mr Witty’s strategy.
The shares were as high as £21.10 in November 2000, since when generic and pipeline concerns ravaged the company.
However, GSK is through the worst of the generic hits it will take – only Valtrex, the second best-selling drug with £349m of sales in this quarter, is left – and the pipeline is also brighter. In the last few days alone, three drugs have been approved in the US, including cancer vaccine Cervarix.
Trading margins in latest quarter were 31.1pc, below consensus of 31.4pc, but Questor respects the determination with which Mr Witty is taking on what was deemed impossible – turning the direction of the GSK juggernaut. Buy.