A Better Bet Than BP Or Shell?

Published in Company Comment on 3 May 2012

This FTSE 100 resource stock has grown by 20 times in 20 years.

When you think of safe but profitable oil and gas investments in the FTSE 100, you probably think of Royal Dutch Shell (LSE: RDSB) or BP (LSE: BP) -- I know I did. But you may have been missing a rather impressive alternative.

Powered by gas

BG Group's (LSE: BG) share price has risen by 20 times since 1992. In comparison, the FTSE 100 is currently just 2.1 times than it was in May 1992.

BG Group's long-term record puts most other big-cap oil and gas companies in the shade, as these figures show:

Company10-year growth10-year average total return
BG374%17.5%
Royal Dutch Shell29%4.6%
BP-25%1%
FTSE 10011%4.8%

Source: Morningstar, Digital Look

BG Group is not a big dividend payer, typically yielding just over 1%, but its capital growth has more than compensated for this over the last decade. Indeed, anyone who bought BG shares 10 years ago at 306p will now be enjoying a yield of 4.9%!

End to end

One of the keys to BG Group's long-term success has been its ownership of the whole production cycle.

It has carefully built up its asset base so that it owns exploration activities, production assets, transportation, terminals and long-term gas supply contracts all over the world. By doing this it can take a slice of profits at any stage of the chain -- and still make money.

Q1 profits up

BG Group's Q1 earnings were released today, and they make pretty good reading for BG shareholders. Operating profit rose by 21% to $2.4bn, while cash generated by operations rose 47% to $2.6bn. Earnings per share rose 54% to 37.3 cents per share.

The company's production output rose by 5% to 60.9mmboe (million barrels of oil equivalent), while LNG operating profit reached $812m -- up 42% thanks in part to a post-Fukushima surge of demand in Japan.

BG has also been busy on the exploration and production side, with additional production starting up in Norway, Thailand, Egypt and Bolivia and new gas discoveries in Tanzania.

According to BG Group Chief Executive Sir Frank Chapman: "These new sources of production will, at plateau, add around 50 000 barrels of oil equivalent per day net to the Group's production; helping to keep us on track to deliver our 6% to 8% annual average growth rate through to 2020."

Global reach

BG's global diversity means that it produces supplies gas all over the world. This means it can take advantage of regional price differences for gas, which are much greater than for oil, due to transportation difficulties.

For example, while an oversupply of shale gas means that natural gas prices averaged just $2.74 per million British thermal units (mmbtu) in the USA over the last quarter, in the UK the average was $9.35/mmbtu and in Asia it was $16/mmbtu.

Too late to buy BG?

A look at BG Group's share price might suggest that it is too late to get in on the action. Yet I'm not sure it is. The market for gas is growing worldwide as countries increasingly switch from coal and nuclear generation to gas-fired power stations, which provide a happy compromise in terms of cost, pollution and disaster risk.

What's more, this trend is likely to be replicated in the coming decades in India and China, and emerging economies all over the world will drive a general increase in energy consumption.

I think there is still some mileage left in the BG Group juggernaut -- and I am seriously considering adding some to my portfolio.

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Further investment opportunities:

> Roland owns shares in Royal Dutch Shell but does not own any other share mentioned in this article.

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Comments

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richjfool 03 May 2012 , 12:35pm

BG not being a dividend payer rules it out for me.

I held it for a while last year, during which time its SP went up and down (a lot) and during which time it paid me a very small dividend of about £10.

AidyLee1 03 May 2012 , 12:55pm

The edge that Royal Dutch Shell and BP have is a respectable yield... but there are good points written here and elsewhere that suggest BG are good long-term hold. One thing that concerns me though is the doubling of accidents last year, partly through riskier extraction processes... is this an indication of systemic risk-taking that could lead to another Gulf of Mexico?

Excel35 03 May 2012 , 2:07pm

Whats the returns of the 3 companies including dividends? That would be interesting.

jackdaww 03 May 2012 , 2:37pm

bg is my only pick based on growth hopes.

having averaged buying at 1070 over the last 3 years its working so far.

and it does pay A dividend which is important.

i'm betting LNG will get much bigger.

sopavest 03 May 2012 , 3:14pm

@Excel35

The total return column in the table does include dividends - it assumes that all dividends were reinvested.

Hope this helps,

Roland (article author)

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