Shares digital

BG Group (BG.) – £11.80, stop loss 944p

SHARES SUMMARY

World class oil and gas major in growth market with analysts steadily upgrading their reserve and profit forecasts. Also a takeover target.

Business:

Most successful global discoverer of oil and gas

Vital stats:

Market value: £39.5 billion

Historic PE for 2007: 22.3

Prospective PE 2008: 16.5

Prospective PE 2009: 16.3

Sector PE: 14.5

1-month relative strength: 15.3%

1-year relative strength: 79.5%

Yield for 2007: 0.8%

NMS: 20,000

Spread: 0.09%

When in doubt plump for quality, and the chances of BG falling out of bed are remote. Global energy demand will rise even if the US goes into recession and this means oil and gas prices are unlikely to fall by more than 10%-20% from current lofty levels. Indeed, BP (BP.) has lifted its long term oil estimate from $45 a barrel to $60, compared to the current price of $88 a barrel.

BG’s strategy update last week, together with the full year results, were well received. The main strand is the huge Tupi oil and gas field offshore Brazil. Reserve estimates have risen by 30% over the last few months and could be upped by a similar amount again, making it easily the biggest find in the last 25 years.

There could be over 30 billion barrels of energy at Tupi and BG has a 25% stake in the field. Only two wells have been drilled so far which is why no one is sure how big the field is and how much it will cost to develop.

Stockbroker Evolution Securities reckons that if net reserves to BG are at the upper end of its range, then Tupi could be worth 300p a share alone.

Happily for BG, exploration success offshore Brazil is just one of many triumphs in the last few years.

The group is making discoveries and money all round the world in Australia, Egypt, Kazakhstan, India and Bolivia, not forgetting the good old North Sea where the Maria field began production in December and the Jasmine North Terrace find was announced earlier this month.

The other big strength is liquid natural gas where BG is again a world leader. LNG profits rocketed by 48% million to £521 million last year due to higher volumes and prices. Regasification project spending is going full tilt in places like Chile, the UK and Middle East.

BG is increasing its target return on LNG from 13% to 15% this year and to 16% in 2009. Shipping and marketing the gas is also securing higher margins. Between the lines it is clear that BG expects prices to remain firm or rise further due to LNG supply shortages.

Soaring costs in building LNG plants has prevented more competitors entering the market which is good for BG. One of its great strengths is project management skills ensuring major projects are delivered on time and on budget.

Though the profit rise for 2007 was just 5%, to £3.25 billion, it jumped 32% in the final quarter, and this is not the only indicator. Net asset value is also a key valuation determinant and this is rising rapidly, and could hit £13 a share with total reserves and resources, up 25% last year to 10 billion boe.

BG has long been seen as a takeover candidate with Royal Dutch Shell (RDSB) the favourite to buy. These rumours have died away as BG’s value doubled to nearly £40 billion in the last year. However, industry heavyweights are believed to be continuing to keep a close eye on BG, looking for the right time to swoop.

Any slip up in execution and share price weakness would probably see a very big bid.

by: Timon Day