BG leads the pack

When the US oil giant, ExxonMobil, launched a $41bn acquisition of a US shale-gas play, XTO, last month, shares in the UK oil and gas major, BG, also jumped. With a $1bn joint venture agreed in June 2009, BG already has significant exposure to the US shale gas industry, which aims to exploit hard-to-drill deposits. Exxon is famously canny, so its acquisition of XTO indicates how significant shale gas is likely to become; but it also confirms that BG retains its knack for spotting the next big thing.

That reputation was established with BG's acquisition of mothballed liquefied natural gas (LNG) import facilities on the US east coast in the early 2000s, when no one else could see their value. BG used these terminals as the anchor for an LNG supply and trading business that subsequently boomed as the rest of the world latched onto the value of LNG.

Brazil is another place where BG has moved ahead of the pack. From 2006 onwards, it hit a string of world-class oil discoveries in the Santos Basin in offshore Brazil; three fields are already established as multi-billion barrel resources and set to enter production over the next three years. A further five discoveries could be equally large, and BG is not yet finished with exploration. The Brazilian government now thinks that the Santos Basin is so prolific it has tightened the tax regine for oil companies seeking entry - but not for first movers, such as BG, which enjoy the original terms.

Meanwhile, the LNG business is changing, and BG with it. For years, BG exploited arbitrage opportunities between the price for LNG in the US and Europe and in the Far East. When the opportunity was there, it switched cargoes from its Atlantic routes to East Asia. It executed this arbitrage so well that profits from its LNG operation continually exceeded expectations. But these opportunities vanished as, simultaneosuly, the global economy softened and new supplies of LNG targeted the Atlantic trade.

Yet BG saw this coming, too. It locked in favourable prices for existing supplies, and so should be able to meet analysts' forecasts for LNG profits in 2009 and 2010. But it also took another major step. Based on its coal-seam gas assets in Queensland, Australia, BG is building an LNG plant in Queensland. Not only has it already contracted for this plant to supply Singapore and China, it has also built an import terminal in Chile. Just as BG's north Atlantic trade is settling into a humdrum existence, its new trade in the soutern hemisphere is opening fresh - and perhaps extremely profitable - opportunities.

Brazil and LNG will propel BG's production growth, which should average some 6 per cent through the coming years, enough to outclass its major competitors. Yet the stock market arguably fails to ascribe sufficient value to them. Assuming the long-term oil price is $70 a barrel - about the present level - stockbroker Evolution reckons that the present value of BG's 'core' existing upstream production and its LNG business is 805p per share. On the same basis, it thinks that the three Brazilian fields in development (ie, not counting the other discoveries) are worth 370p. Meanwhile, it values the Australian coal-seam gas liquefaction play at 170p. These three add up to 1,345p, more than 20 per cent clear of the current share price. And, if all the Brazilian discoveries are developed, that would add another 200p or so to the value.