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2015 a potential watershed for BG

Helge Lund, former head of Norway's Statoil, will take over the reins at BG at a critical point for the group, but there is now cause for guarded optimism
October 31, 2014

BG Group’s (BG.) third-quarter update serves to highlight the contrast between the driller’s immediate and medium-term prospects. Comparative operating profits were down by around a quarter to $1.31bn (£814m). The mid-year contraction in the oil price reduced the group's average realised rate by 7 per cent to $103.91 per barrel, while average daily production fell back by 2 per cent. Overall, upstream earnings were down by 36 per cent compared with a year ago - hardly a stellar quarter. Output continues to be stymied by problems at BG’s operations in Egypt, and the group had to make do with lower revenue entitlement from its operations in Kazakhstan.

IC TIP: Hold at 1015p

After years when it seemed as if BG could do no wrong, shareholders have had to endure a frustrating period, characterised by production short-falls and project delays. But 2015 may come to be seen as something of a watershed for the group, particularly with regard to its production profile. Critically, BG confirmed that the Queensland Curtis LNG (QCLNG) project is on track for first production in December, while the ramp-up underway at the group’s interests in Brazil’s Santos Basin is gathering momentum, with net production exceeding 100,000 barrels per day earlier this month.

From early next year, Helge Lund, former head of Norway's Statoil, will take over the reins at BG. With a weakening oil price environment and lingering uncertainties over the group’s Egyptian assets, there’s no shortage of challenges for Mr Lund. Indeed, BG's management provided details on the group's sensitivity to the oil price - a $65m-$75m hit for each $1 slide on a barrel of crude. Nevertheless, with the addition of production from QCLNG, combined with the continued scale-up in volumes from Brazil, there is every chance that cash margins will improve substantially over the course of next year - and beyond.

For the moment, however, the group can shed no light as to when - or indeed if - LNG exports from Egypt will recommence. (To this end, BG is in talks with BP (BP.) to link their two gas developments off Egypt's coast). There is also a lack of detail on the likely production trajectory in both Brazil and Queensland, buy there is certainly a little more room for optimism following the update.