During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business-quality and value indicators.
In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting gas and oil exploration and production company BG Group (LSE: BG) (NASDAQOTH: BRGYY.US), which scored 22 out of 25 in May.
Profits down a little
In recent news, BG’s long-serving Chief Operating Officer, Martin Houston (great name for an oilman!), has stepped down to make way for internally promoted Sami Iskander.
Meanwhile, BG shares have been marking time since May, up just 2.5% to 1247p, and the three-quarter results statement released at the end of October suggests why – earnings for the first nine months are down 4% on a year ago.
BG’s Chief Executive, Chris Finlayson, blamed lower upstream and LNG volumes for the decline. The firm reduced its rig-count to pursue value over volume in the US, affecting upstream operations. However, BG expects production to recover in the fourth quarter as North Sea maintenance shutdowns complete and new projects come on-stream.
Great long-term track record
Last year, BG earned 58% of its operating profit from upstream operations and 42% from its large LNG shipping and marketing business. The firm has performed well since the mid-nineties with 15 big discoveries around the world adding an average 1 billion boe (barrels of oil equivalent) to its resource reserves every year for a decade. The reserves replacement ratio ran at almost 200% over the period and reserves now stand at about 18 billion boe. The share-price did well too.
There could be more growth to come as BG is currently engaged in ramping up exploration expenditure to $1.8 billion per annum.
BG’s total-return potential now
With forward earnings covering the forward dividend just over 4.5 times, I’m happy to keep my dividend-cover score at 5/5. Net debt is running at about 1.9 times the level of operating profits scoring 4/5 now, unchanged from May. This year’s dip in profits prompts me to drop the historical growth score from five to 4/5, and the forward P/E rating of 14.5 seems to overstate earnings growth and dividend yield expectations, scoring 2/5 rather than four last time. Satisfactory recent trading and a positive outlook continue to score 4/5.
Overall, my business-quality and value score has dropped from 22 to 19/25 since May.
What now?
Back in May, I found BG to be attractive and still do now. The relatively steady share price is encouraging set against a year of zero profit growth. The long-term outlook remains positive.