BP (LSE: BP) (NYSE: BP.US) shares are trading at their lowest levels since May 2012, and are down by nearly 15% from their July peak. BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) has fared even worse, sliding by nearly 30% this year.
After such major declines, both companies seem likely to offer value to investors looking for a recovery buy — but is this true, and if so, which company offers the best value?
The simple answer?
Using conventional metrics such as forecast yield and P/E, the answer might seem obvious — BP is clearly cheaper than BG:
|
|
BP |
BG |
|
2015 forecast P/E |
9.3 |
13.0 |
|
2015 forecast yield |
6.2% |
2.4% |
|
2015 forecast earnings growth |
+1.8% |
-1.0% |
|
Price to book value |
0.95 |
1.4 |
However, when it comes to resources companies, these basic financial metrics don’t always tell the whole story.
The big problem with BG over the last few years has been that its success as an explorer has not yet been matched by its ability to develop and generate cash from its assets. In theory, this means that BG’s earnings have not reflected the potential of its assets.
On the other hand, BP has proved very able to generate cash from its assets, both by maximising production and by selling them. The problem for BP is different: a multi-billion payout for the Macondo disaster continues to hang over the firm, while its decision to buy a 20% stake in Russian giant Rosneft no longer looks quite so clever, at least in the near future.
A different view
The core value of a resources company is defined by two things: its assets and their ability to be commercially exploited.
Assets that have proven commercial viability are known as reserves, and by comparing the valuation of BG and BP’s proved reserves, we can get an alternative view on which company offers better value:
|
|
BP |
BG |
|
Proved oil reserves (million barrels) |
9,882 |
1,532 |
|
Proved natural gas reserves (billion cubic feet) |
45,975 |
12,041 |
|
Total proved reserves (million barrels of oil equivalent) |
17,544 |
3,538 |
|
Enterprise Value/boe of proved reserves |
$5.16 |
$10.83 |
Source: Company annual reports
I have to admit I was surprised when I calculated these numbers: I really thought they would be closer.
On this basis, BP continues to look much cheaper than BG — and this conclusion is backed up by the company’s own discounted cash flow valuations for their proved reserves:
|
|
BP |
BG |
|
Market cap |
£75bn |
£31bn |
|
Discounted future cash flow valuation for proved reserves |
£80bn |
£18bn |
Source: company annual reports
Again, it’s clear that BG’s own figures suggest it is overvalued, relative to BP. However, I should point out that these figures were calculated assuming oil prices of $108. The picture could change sharply when they are recalculated for lower oil prices at the end of this year — but my money is still on BP as a strong buy.