Once a stock market darling, BG Group (LSE: BG) (NASDAQOTH: BRGGY.US) has fallen out of favour with investors in the past 18 months after a series of profit warnings knocked the shares for six: they’re currently 16% down over that period. But a couple of recent geopolitical events could help to boost the company and accelerate its recovery.
Ukraine
Ratings agency Fitch has identified BG as one of just four European companies likely to gain from the Ukraine crisis. It’s likely that over time European nations will seek to reduce their dependence on Russia’s gas monopoly Gazprom. That could well see more liquefied natural gas (LNG) being imported to this country, for example, where BG operates import terminals.
The crisis has also eased political opposition to LNG exports in the US. BG was one of the first to build capacity to export cheap gas from the US, and is participating in three of the six LNG export projects that have so far been approved.
Before the Ukraine crisis, BG wrote off $1.1bn on its US assets due to glut of shale gas. If it can export that gas to Europe, at world prices, the value could be clawed back.
Egypt
BG wrote off another $1.3bn on its Egyptian assets. Egypt was responsible for a sixth of BG’s gas production, but the turmoil in that country forced it to cut export volumes when the government diverted supplies to the domestic market. Egypt’s chaotic energy market is inefficient and depends on heavily subsidised prices. The company is reluctant to invest further in the country, and it’s owed $1.2bn by the Egyptian government, of which $0.5bn is overdue.
Egypt’s former defence minister, General al-Sisi, has now formally declared his intention to run for the Presidency. He is popular and widely expected to win on the expectation that he will restore stability and prosperity.
Stability would enable Egypt to implement the reforms to its energy market that the current interim government is too weak to contemplate. In time, that should allow BG to increase exports and resume investment. It’s also plausible that General al-Sisi will want to maintain normal relations with foreign investors, which should ease concerns over BG’s unpaid debts.
Back in favour?
The company looks cheap on a historic P/E of 9.5, but the forecast decline in production has analysts pencilling in a near 50% drop in EPS. That makes the prospective P/E of 18 look expensive, though looking forward to 2015’s forecast earnings, the P/E is a more reasonable 14.