BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) has been a terrific growth story for long-term investors. The firm’s share price is up by 2,245% since 1988, and it’s risen by 368% over the last ten years.
The only problem is that over the last five years, BG’s shares have risen by just 10% — and the firm’s 1.4% yield hasn’t been much of a compensation for this lacklustre performance, either. So what’s gone wrong?
Growing pains
In my view, nothing has gone wrong. What I believe is happening, is that BG Group is undergoing the necessary transition from an exploration-driven growth company, into a major oil and gas producer.
BG Group’s shares have long-enjoyed a substantial growth premium, and continue to trade on a flighty P/E of nearly 16, but it can no longer deliver the exciting year-on-year growth that investors have come to expect.
The problem now is that BG has reached a scale where it cannot do anything quickly or cheaply. For example, the company’s Queensland LNG project in Australia is expected to have cost $20.4bn by the time production begins in 2014.
A quality firm
Don’t get me wrong — BG is a great firm that has made world-class oil and gas discoveries.
The only problem is that despite BG’s £40bn market capitalisation, and its growing focus on production, its shares are still priced like those of a smaller growth stock, with a high P/E rating, and a low yield.
BG Group’s share price fell by 20% in one day last year, when it shocked investors by warning that production would rise by just 3% in 2012, and would remain broadly flat in 2013. More recently, BG’s share price slid 5% in one day, when it warned that operational delays would reduce production growth in 2014.
To me, these falls suggest that a lot of BG’s medium-term growth potential is already priced into its shares, and that markets will continue punish any future disappointments quite severely.
Is BG right for your portfolio?
At present, to enjoy an income from BG shares in-line with the FTSE 100 average of 2.7%, you’d have to have paid around 630p for your BG Group shares, a price last seen in 2006. This situation should improve in the future, as BG shifts its focus from growth to shareholder returns, but personally, I’m not sure it’s worth the wait.