Tuesday, 4 February 2014

BG Group - underpinning and monetisation

BG Group's surprise (and deeply disappointing) corporate update in late January induced a sharp share price fall back (almost) to a sub 1000p share price (around which level the shares have found support at various points over the last five years as per the chart below). 

I noted in my posting in late January that:

'All the medium-term value remains though, especially with the growth of the Brazilian and Australian assets and a return to c. 7% production growth in 2015.  The full set of 2013 numbers will be out in early February, but everyone will be looking at the 2014-15 commentary.  That's the big opportunity for the still fairly new CEO and his management team to lay out to the financial world the future story'.

Given large elements of the numbers were pre-released in the late January, what additional comments did the management give this time?  Here are my highlights from the conference call transcript along with a few interpretative comments of my own:

'BG must be a company that delivers on its commitments each and every year' - an obvious and easy comment to make...now the question is whether they can actually do this

'Today, we are giving very clear guidance for 2014 on production, unit E&P costs and LNG Shipping & Marketing total operating profit. We will keep the investor community fully informed of our progress. My top priority is to execute our plans consistently and effectively, especially the commissioning of QCLNG in Australia later this year. I am pushing change through the organization, and we are clear what we need to do' - communication, execution and change.  Note Australia is high up on the execution front.  As for pushing change, it is the usual cutting of reporting lines which is not ground-breaking but sensible
'Active portfolio management, well, it's an important component of our strategy. And in 2013, we completed 4 major transactions that, along with some smaller deals, released almost $4.8 billion of capital, of which about $200 million is deferred consideration. When combined with our 2012 activity, total capital to be released from our divestment program in 2012 and 2013 amounts to $8.5 billion'. - that's a good statistic (the US$8.5bn) but given cash flow does not return to a net generation level until 2015, does show the sheer magnitude of some of the investments being made

'full year dividend for 2013 to $0.2875, that's an increase of 10% on last year'. - a good signal but the yield is 1.9%.  BG is going to have to rely more on the prospective growth aspect to differentiate itself versus high yielding mega cap oil names

'The rebound in volumes in 2015 will be led by growth from Brazil and Australia' - in case we did not remember

'the outlook for the global LNG market remains tight. New projects across the industry continued to be delayed or deferred. And demand, particularly from Asia, will continue to increase'. - the view remains that fundamentals are good here

'the group has now passed its peak year for CapEx, and I now expect it to trend downwards. These priorities will enable us to deliver our significant growth plans next year, and we remain on track to be cash flow positive in 2015' - very important for the investment case, especially as it helps the push towards free cash flow generation in 2015

Brazil – ‘We'll begin adding new wells in the coming months and expect to reach plateau with 5 or 6 producing wells...FPSOs 4 and 5 are due to be deployed on SapinhoĆ” and Iracema. They are on budget and around 88 -- 80% complete, respectively. Both are now in Brazil for top sites integration. And the operator expects to install these facilities on schedule in the second half of this year' - if you want to judge progress in Brazil, judge it this way on producing wells and FPSO deployments.  A couple of good metrics to follow

'we aim to monetize through production or disposal up to 50% of our discovered resources in the next 10 years and create a focused portfolio of 10 to 15 high quality and material assets. We made a good start in 2013 and have monetized around 6% of our resource base' - the most important comment in the whole conference call, in my view.  Remember the US$8.5bn in monetisation above?  Well equate that to the 6% mentioned above implies that the 50% figure above is equivalent to about US$70bn...or pretty much the BG Group EV today.  Time, required capex and discounting will change this figure when considering something relevant today, but what it says to me is that the BG share price today has underpinning.

The last transcript comment mentioned above, I think, is the critical one.  BG Group management played it pretty straight and said made all the comments you would expect.  Certainly the analytical community has more metrics and insights to judge them fully now. 

I was heartened by the 2%+ share price move today.  Sentiment in the stock is clearly still fragile but I retain hope that the 1000p level will hold (excepting high market volatility).  If given a further opportunity near that level, I will augment my current position further.  A fairer value today is 1200p+.  Any initial speculative approach would have to be much nearer 1500p based on the resource base monetisation comment. 

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