Share of the Week
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Last updated: 30 January 2012
BG Group is involved across the natural gas and oil supply chain with activities in exploration, development, transmission, production and distribution. The company operates in three key sectors; Exploration and Production, Liquefied Natural Gas (LNG), and Transmission and Distribution. The group is headquartered in the United Kingdom but over 60% of its employees are located outside the UK.
BG Group is a gas specialist and so mainly operates in a market very different to that for oil. Firms operating in the gas industry need to have an alternative skill set and are involved with a commodity for which there is neither an integrated global market nor a common global price. Gas is a relatively abundant resource but not where it is most needed so transport and distribution is a critical part of the supply chain. Gas pipelines are not a particularly efficient method of long distance transportation, and whilst 60% of oil is sold on a seaborne basis, only 6% of gas currently is. As a result the process of first liquefying the gas has become a popular distribution method. However, only 25 countries in world can receive liquefied natural gas; BG Group supplies 22 of them.
An area of particular interest with regards to BG Group is Australia. The company has invested a lot of capital into establishing an LNG source in the Asia Pacific region. There are several substantial developed economy markets, such as Japan and Singapore, alongside ever-growing demand from Asian emerging economies such as China. At the moment a large portion of these customers are served by shipping liquefied natural gas from sources such as Egypt and Trinidad. By establishing a plentiful supply of gas within the region BG Group is accessing an existing captive market. As a result of the company’s substantial capital expenditure the first LNG is likely to start flowing in 2014 with the project producing cash for the following couple of decades. Moreover, BG Group has already sold all the output expected to be produced. Rather than committing now to prices that might be cheap in the future, the company have importantly sold the future produce at prices linked to the price of oil on the day of delivery.
The price of natural gas has received a lot of attention in recent times. The main price used in North America is known as the Henry Hub price, named after a point on the natural gas pipeline system in Louisiana. This has fallen heavily since July 2011, with the shale gas boom in the US having dramatically increased supply. However, whilst this has been having a negative impact upon BG Group’s upstream business, it is a positive factor for the downstream LNG business. This is as a result of the disparity between BG Group purchasing a large part of the LNG supply at a price linked to Henry Hub before selling it at the LNG Asia Pacific Basin spot price which is historically high.
BG Group is currently trading at a multiple of around 16 times earnings forecast over the next 12 months. Whilst this price is a premium compared to both its peers and its own historical average we believe it is a price worth paying on the basis of the company’s LNG prowess, relatively high resource base and solid cost control.
