Why I Would Choose BG Group plc Over BP plc

BG (LSE: BG) and BP (LSE: BP) are very different companies. 

BG, in many respects, is an innovator, an upstart that’s taken on large projects with a “go-get-’em” approach. Decisions are often made quickly without the lengthy approval process that other oil majors (such as BP) implement. 

BP, on the other hand, is considered a “diplomat”, looking to build healthy relationships and make reasoned investment decisions.

Aggressive approach

BG’s hard-hitting approach has paid off over the years. In the 15 years to 2012, the company discovered 16 new, huge oil & gas prospects, which it has moved quickly to develop. This exploration record is unmatched, even by the likes of Tullow Oil. 

However, as BG has grown, the company’s go-go nature has started to hold it back. Over optimistic forecasts have resulted in a string of profit warnings and operational disappointments.

Uncontrollable

Factors outside of BG’s control have also worked against the company. At the beginning of 2014 BG was forced to book a $3.1bn impairment charge on its Egyptian assets after the country’s authorities diverted gas earmarked for export to the domestic market. The company still cannot export gas from the region.

Additionally, BG’s Australian assets have suffered from cost overruns, and the company has become caught up in the Petrobras scandal.

Specifically, BG’s world-class Brazilian assets — five oil fields in the offshore Santos Basin — are jointly owned with Petrobras, Brazil’s state oil company. There’s a chance that Petrobras will struggle to pull its weight in the development of these fields because of the corruption scandal. 

Multiple uncertainties

Like BG, BP has its fair share of issues. However, BP’s issues have been more costly to solve and are likely to hold the company back for longer.

For example, BP’s ultimate liability for its role in the Gulf of Mexico disaster is still unknown. The courts have yet to decide the amount of responsibility and the final penalty the firm will pay for the catastrophe.

BP continues to fight compensation claims for the spill and has so far paid out $44bn in connection with the accident. An additional charge of $477m was taken in the fourth quarter of 2014 reflecting increased provision for litigation costs.

Then there’s BP’s Russian troubles to consider. The company owns around 20% of Russian oil giant Rosneft, which is struggling to raise capital amid a background of uncertainty. Rosneft is currently seeking shareholder approval to raise $204bn in loans.

The better pick

Despite BG’s operational issues, the company is still going strong and isn’t showing any signs of slowing down.

Moreover, Shell’s recent bid for the group, at a premium of 52% to the 90 trading day average, shows how much value is really locked up in BG’s asset base. 

Shell’s bid has put a floor under BG’s share price. Shell’s offer of around 1,350p per share is 16.7% above current levels. If the bid fails to go through, BG has the potential to re-ignite growth as its world-class assets come on stream.

Moreover, much of the bad news released over the past few years has been factored into the company’s share price.