At the beginning of February we exited our long-term buy call on BG Group (BG.) , as we ventured that there were unlikely to be any catalysts for a re-rating ahead of an expected fourth-quarter production surge. But we may have underestimated management's desire to shore up the group's flagging share price, which has declined by 27.8 per cent against the FTSE All-Share over the past 12 months. After years of heavy capital expenditure, it is expected that BG will start generating positive free cash flow in 2015, and this has prompted analysts to ponder whether the group might follow the lead provided by other sector players with reducing capital commitments, and take the decision to return a higher proportion of cash to shareholders. The group increased its full-year payout by 13 per cent and, despite the serious capital outlay of recent years, gearing is relatively modest.
Whether there's any basis to this speculation should become apparent next week when BG's new chief executive, Chris Finlayson, presents the group's strategy update to City analysts. BG's share price has been in the doldrums since last November when it was announced that overall production would be flat through 2013, partly as a result of an unforeseen closure of the Elgin/Franklin gas platform in the North Sea. BG's new chief will attempt to woo analysts against a backdrop of weakening energy prices, but at least the group's first-quarter results confirmed that key projects in Australia and Brazil remain on schedule and within budget (excluding previous overruns), while production has finally restarted at Elgin/Franklin.
It's unlikely that Mr Finlayson will provide any more details on whether BG plans to move ahead with Norway's Statoil on a planned joint-development of a $10bn (£6.6bn) gas liquefaction facility in Tanzania. We will probably have to wait until 2016 for that - but the ability of BG to meet any capital commitment in this area (together with any increased largesse towards shareholders) will be partially facilitated through the continued sale of non-core assets, while the pursuit of enhanced strategic agreements remains a priority. The latter point was aptly demonstrated by a $1.93bn (£1.2bn) contract signed this week with China's state-owned oil giant CNOOC that will result in the latter taking an additional 5m tonnes of LNG a year from 2015 (taking total volumes to 8.6m tonnes) as part of CNOOC increasing its stake in BG's Queensland Curtis LNG project Train 1 facility from 10 per cent to 50 per cent. The deal will make BG the biggest gas exporter to the People's Republic.
