Financial Times: Light sweet temptation: “What next for BG?”: “A 44 per cent rise in profits mirrors the success of BP and Shell. Its two larger rivals, however, could not match a 7 per cent year-on-year increase in production.” (ShellNews.net) 11 May 05

Published: May 11 2005

What next for BG? That might seem like a churlish question, given the gas group's excellent first quarter results. But it is also a valid one. A 44 per cent rise in profits mirrors the success of BP and Shell. Its two larger rivals, however, could not match a 7 per cent year-on-year increase in production. No wonder this medium-sized company trades on a par with the super-majors at a multiple of 7.2 times debt-adjusted cash flow for 2006.

Yet these results barely registered on BG's share price yesterday. Success to date has been due largely to flawless exploitation of BG's pre-demerger legacy of large-scale assets. It remains committed to an organic growth strategy. No-one doubts BG's technical expertise - just look at the Manatee discovery in Trinidad. It has bought up new acreage from Brazil to Canada. Early signs are encouraging.

But there is no getting away from the deteriorating industry environment. The high price paid recently by rival Statoil to EnCana for exploration assets highlights the competitive pressure to grow reserves. Governments are muscling in with higher tax rates and national oil companies. And the 36 per cent increase in BG's lifting costs last quarter is a symptom of rampant inflation in the upstream sector.

BG's strategy depends on big strikes in the not-too-distant future. But it must be tempting for management to, belatedly, leverage its highly-rated paper and credibility to deepen the asset base with acquisitions.

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