BG Group (BG.) reported first-quarter earnings Friday that reflected the decline in commodity prices during the quarter but also offered evidence of a turnaround in production growth. At this point, however, overcoming regulatory hurdles and completing the acquisition by Shell in early 2016 are bigger risks for investors than continued operational improvement.
A central component of BG's strategy is flexibility
That said, production did increase slightly, by 1%, as a doubling of Brazilian and Australian volumes offset declines largely in the United Kingdom due to maintenance.
With those volumes set to return shortly, growth should accelerate later in the year. Despite the growth, lower commodity prices resulted in upstream EBITDA falling to $860 million from $1.9 billion last year. Liquified natural gas EBITDA held up well though, only falling to $708 million in the first quarter from $730 million last year. Full-year liquified natural gas EBITDA guidance is $1.3 billion to $1.5 billion.
We found nothing in the quarterly results that would alter our thesis on BG or change the likelihood of Shell completing the acquisition. As mentioned, regulatory approval in the various countries in which Shell and BG operate will be the next milestones we'll be watching for. Until then, our narrow moat rating and fair value estimate, which is based on a 95% probability of Shell completing the acquisition, remain unchanged.
BG's strategy of connecting low-cost natural gas resources to high-value markets via LNG has resulted in the company delivering returns in excess of its cost of capital. As a result, we assign the company a narrow moat. A central component of BG's strategy is flexibility. By participating in the global LNG trade, BG can identify the highest-value market at any time and divert its own production or contracted cargo to that location.
The incremental value BG achieves accrues to both its exploration and production and LNG operations, supporting returns for both segments.
