Should I Buy BG Group?

Published in Company Comment on 8 November 2012

Harvey Jones sizes up BG Group (LSE: BG.).

It's time to go shopping for shares again, but where to start? Fun pharmo GlaxoSmithKline (LSE: GSK)? Pipeline prince National Grid (LSE: NG)? Or oil major Royal Dutch Shell (LSE: RDSB)?

There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy BG Group (LSE: BG)?

Dash for gas

If you like buying big global blue chips on bad news, then you will been taking a close look at BG Group right now, because the news has been very bad indeed. The UK-listed oil and gas exploration giant, carved out of British Gas 15 years ago, has just seen its share price plunge 20% after admitting it won't grow next year, following a string of delays on several projects worldwide. At time of writing, BG Group trades at £10.50, down from £13.30 on 30 October. That looks like a nice discount, but should you make a dash for gas?

Frack and ruin

BG Group's growth plans have been hit by the shutdown of the Elgin rig in the North Sea earlier this year, following a leak. It has been forced to postpone production at another North Sea field, Jasmine, until late 2013, suffered at delays at two sites in Brazil, and admitted that there's less gas in its Egypt operation as hoped. BG Group is another victim of the shale revolution, which has pushed gas prices to near record lows and forced it to scale back its US drilling operations until prices rise and margins improve. Frankly, it's just one fracking headache after another.

Life's a gas

There was some pain relief, with BG Group posting a 16% rise in third-quarter earnings to £746 million, and production up 5% on the same quarter last year. Production across 2012 should be around 3%. Management also insist that it will return to growth in 2014, and its long-term targets are still on track. Short-term traders clearly thought the drop had been overdone, with Hargreaves Lansdown (LSE: HL) reporting that 96% of its clients trading BG Group were buyers. Some were hoping to make quick gains once the market had calmed down, others were topping up their long-term holdings.

BG or not BG?

Long-term investors dream of catching a falling giant, but it's a risky business. You might pick up a Standard Chartered (LSE: STAN), which has since rebounded 20% since its 7 August low. Or you might, like I did, buy BP too soon after the Gulf of Mexico oil spill, only to watch it fall lower and lower. BG Group isn't a surefire rebound stock. It is heavily exposed to risky areas such as exploration and production, whereas the vertically integrated majors like BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB) are better diversified in areas such as refining, transportation, chemical processing and retail. BG Group isn't even that cheap, despite recent falls, trading on a forecast price-to-earnings ratio of 12.9 for December 2012. And it yields just 1.4%, so your patience won't be rewarded by a handsome dividend. Compare those figures to Shell, trading at 8.5 times earnings with 4.7% yield. Analysts are divided over BG Group. Investec has downgraded it from "hold" to "sell", while Nomura has kept its "buy" rating with a target price of £16. I'm equally divided, but the cautious side of me is holding back and hoping for aftershocks.

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> Harvey owns shares in Royal Dutch Shell. He doesn't own any shares mentioned in this article. The Motley Fool owns shares in Hargreaves Lansdown and Standard Chartered.

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