Should I Buy BG Group?
LONDON -- It's time to go shopping for shares again, but where to start? Fun pharmo GlaxoSmithKline. Pipeline prince National Grid? Or oil major Royal Dutch Shell?
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 (ISE: BG.L) ?
Dash for gas
If you like buying big global blue chips on bad news, then you will have been taking a close look at BG Group recently, because the news has been very bad indeed. The U.K.-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 the time of writing, BG Group trades at 10.50 pounds, down from 13.30 pounds on Oct. 30. 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 also been forced to postpone production at another North Sea field until late 2013, suffered delays at two sites in Brazil, and admitted that there's less gas in its Egypt operation than 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 U.S. 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 pounds and production up 5% on the same quarter last year. Production across 2012 should be around 3%. Management also insists 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; Hargreaves Lansdown reported that 96% of its clients trading BG Group were buyers. Some were hoping to make quick gains once the market had calmed down, while 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 which has rebounded 20% since its Aug. 7 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 and Royal Dutch Shell 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 a 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 pounds. I'm equally divided, but the cautious side of me is holding back and hoping for aftershocks.
Tastier blue chips
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The article Should I Buy BG Group? originally appeared on Fool.com.
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. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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