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BG
BG, formerly called British Gas, has good medium term prospects and 2004 results were strong in BG’s upstream business on high prices, but weak in BG’s smaller downstream (distribution and power generation) businesses for the same reason.
BG is an integrated gas company with activities across the whole range of gas operations from exploration to the final consumer. BG has four operating divisions; Exploration and Production (E&P - half of turnover), Liquefied Natural Gas (LNG - 29% of turnover), Transmission and Distribution (T&D - 19% of turnover), Power Generation (5% of turnover) and Other Activities. Other activities is a catch-all for a range of smaller businesses including gas powered vehicles and telecoms.
BG announced good full year earnings for 2004 (year to December), driven mainly by the upstream exploration and production (E&P) business which generates 75% of operating profits. BG’s downstream businesses, particularly power generation and distribution and transmission, suffered from higher costs of inputs. E&P reported a 26% growth in operating profits (to £1,204m), Liquefied Natural gas a 22% growth (to £94m) and transmission and distribution a 16% growth (to £134m). Profits from power generation shrank by 6% to £121m.
E&P, BG’s largest division, increased operating profit; primarily due to production volume growth and higher upstream prices, partially offset by a higher exploration charge of £126m (up £44m mainly due to the step up in exploration activity) and the effect of the weaker US dollar. BG’s production volumes increased by 7% to 166.8 mmboe mainly due to contributions from new fields.
Liquefied Natural gas profits improved due to higher volumes. Operating profits in transmission and distribution increased 16%, reflecting a profit of £80m at Comgas (a Brazilian business) driven by 11% volume growth and improved margins partially offset by the weaker Brazilian real.
Operating profits in the power generation business were adversely affected by the impact of the weaker US Dollar on the Philippines power businesses.
Although oil prices have eased recently we believe that strong underlying demand and limited buffer stocks will keep prices at healthy levels; the medium term outlook for upstream players is still good. The company has increased spend on exploration as well as investment in Egypt, the UK and Kazakhstan which should drive volumes next year.
BG’s total capital expenditure is expected to be £2.4bn in 2005-6. BG has increased its 2006 exploration and production target by 9.4% to 580,000 barrels of oil equivalent a day from 530,000 barrels. BG’s 2006 liquefied natural-gas volume target was raised to 6.9m metric tons per annum from 6.6m.
BG shares trade at 395p, a prospective PE of 16.6× which is at the upper end of the sector but is justified by good growth prospects. BG’s yield of 1% is poor comapered to the oil majors, BP and Shell pay around 3%.
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