LNG Investing

Brian Hicks

Written By Brian Hicks

Posted May 16, 2013

BG Group plc (LSE: BG), the British oil and gas company, has decided to put more emphasis on its operations relating to the exploration, exploitation, and development of liquefied natural gas. BG’s major assets lie in Brazil and Australia.

lng tankerReuters reports that the company’s impressive levels of capital spending will likely peak in 2015, while the part of its total production with profit margins over $50 per barrel of oil equivalent is expected to increase about threefold over the next half decade.

Shareholders may expect surplus cash returns from that time onward. BG’s basic ambition is to either sell or produce at least 50 percent of its discovered resources over the next decade.

BG’s fortunes on the market have been fluctuating in recent times. First, BG stated last year that it foresaw output falling below projected levels. This year in February, BG gave up on its goal of 1 million barrels of oil equivalent per day by 2015.

Interestingly, the steep drop in natural gas prices over here in the U.S. was cited as a major factor, as were some unsuccessful efforts in Egyptian well drilling. However, as of Tuesday BG, was doing quite well amongst European oil and gas stocks. BG was up 3.2 percent, at 1,223 pence.

LNG Focus

BG’s not-so-subtle shift in focus toward liquefied natural gas is something investors should pay close attention to. Businessweek indicates that BG projects to send between 17 and 20 million tons of LNG per year to the market. Fueling this increase in production will be increased production over in Australia and, of course, the U.S.

Businessweek reports:

“In a period where LNG demand is expected to grow twice as fast as overall gas demand, with underlying supply needing to grow by nearly 9 percent to meet total demand, BG Group is well positioned to capitalise on this growing market,” Chief Executive Officer Chris Finlayson said in the statement.

After revising its estimates, BG is hoping for production levels of 775,000 to 825,000 barrels of oil equivalent through 2015. Toward that end, the company will invest about $12 billion altogether in projects over the coming year.

In Australia, the Curtis Island LNG project in Queensland (worth $20 billion) is projected to play a key part. BG expects to make its first shipments of LNG from the Curtis Island project in 2013. Now that the facility is connected to other gas fields and thence to Australia’s most extensive large-diameter twin pipelines, a major bottleneck has been taken care of.

Even as BG repositions itself for LNG-intensive operations, it is looking to wind down investments on major developments elsewhere and offloading junk from its portfolio. The projects in Australia and Brazil are clearly going to be the major areas of focus.

Over in Brazil, the Santos basin has proved to be a happy hunting ground for gas prospectors. Prior to the Brazilian government deciding to curb future development opportunities for foreign investors, BG was able to buy up some acreage.

Petrobras (NYSE: PBR), the state oil company, will oversee all future development of the Santos, at least for the foreseeable future. Just this Tuesday, Petrobras initiated a massive bond sale in order to help finance an ambitious $237 billion investment program scheduled to run through 2017. The sale has raised about $11 billion of new debt thus far.

The Hot LNG Market Out East

Demand for liquefied natural gas is rising very rapidly over in East Asia, and several countries have been angling to get their gas exploited for shipment to these emerging markets. The U.S., meanwhile, is dealing with its own solution to the problem – namely how to go about developing natural gas export terminals.

President Obama has acknowledged the issue, and a decision one way or another is likely to emerge soon. The short-term benefits of exporting natural gas to Asian markets is obvious: plenty of new U.S. jobs will be created and the companies will rake in the profits.

However, over the longer term this will erode our competitive advantage (in other words, the current cheap prices of gas will rise). That’s why it’s a matter of some delicacy.

Meanwhile, BG has for some time been an investor favorite due to its high production growth projections and general ability to deliver on the promises. Indeed, the company had projected growth rates between 6 to 8 percent through 2020.

However, BG is not quite in the giant leagues alongside Royal Dutch Shell Co. (NYSE: RDS-A) or Exxon Mobil (NYSE: XOM). These companies enjoy certain economies of scale and institutional heft that more modest companies cannot. That’s why BG is shifting its operational emphases in order to play to its strengths.


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