ACCIDENTS of history make BG
shares look decidedly expensive. As a remnant part of the
British Gas privatised by Baroness Thatcher, it may still be
assumed that BG is one of those steady-as-she-goes blue chips
that sits comfortably in a widows-and-orphans equity portfolio.
At the same time, it is tempting to consider BG within a peer
group encompassing oil majors such as BP and Shell. BG is
different to BP and Shell because it is about gas, not oil, but,
bereft of anything else, BG, BP and Shell constitute respectable
Yet BG shares, judged with reference to the prospective
p/e ratio of 14.5 and dividend yield of less than 11 per cent,
are expensive beside both these peers. BT shares, for example,
trade on a cheapish prospective p/e ratio of 11.5 and give a
dividend yield of 5.5 per cent. Shares in Centrica — BG’s twin
offspring from British Gas — trade on a not-so-cheap p/e ratio
of 13, but give a 4.6 per cent dividend yield that gives the
stock notable value characteristics. Shares in BP and Shell,
meanwhile, hover on p/e ratios of about 10.5 and give dividend
yields of 3.3 and 3.6 per cent respectively.
Takeover speculation, much discussed but scantly evidenced,
partly explains the BG share-price premium. It also partly
explains why the shares have gently but steadily outperformed
the oil and gas sector, as shown in the graph, over the past
three years. There is a more convincing explanation, however.
Rather than seeing BG as a relatively small privatisation stock
or oil and gas blue chip, it may be more useful to see it as a
relatively large exploration and production (E&P) play. If one
considers BG’s peers to be the likes of Cairn Energy and Tullow
Oil, the shares look reasonably valued. Cairn stock trades on a
prospective p/e ratio of 76 and gives no dividend. Shares in
Tullow, which may be a better comparator since it has more
producing assets, sit on a p/e of 13.5 and give a 1 per cent
Yesterday’s trading statement from BG should settle the
nervousness created last month when a decision to buy back £1
billion of shares was interpreted as suggesting that the company
as running out of growth ideas. The more obvious interpretation
is that the buyback shows that BG is producing more cash that it
can sensibly invest. And it is a good sign.
In the context of E&P plays, BG shares are not expensive.
But, as with all E&P plays, the potential for added return comes
with added risk. Hold.