BG Group Plc (BG/)’s valuation falling by half in less than two years is making even a $60 billion company look vulnerable to a takeover as oil giants hunt for growth in new frontiers.
Chief Executive Officer Chris Finlayson took over on Jan. 1 after BG’s 26 percent stock drop last year, its worst annual return as the Reading, England-based company said project delays will hold back output growth in 2013. While the explorer’s price-earnings ratio of 15.5 is higher than its peers in North America and Europe, the multiple is almost half as expensive as it was in April 2011, according to data compiled by Bloomberg.
BG, with enough oil and gas resources to pump for the next 73 years, has stakes in the “Big Five” oil fields off Brazil and expanding liquefied natural gas projects from Canada to Australia. The company discovered more oil and gas in 2011 to replace what it pumped from wells than any other peer, data compiled by Bloomberg show. Exxon Mobil Corp. (XOM:US) could be lured to BG to help fuel growth after its production dropped 7.5 percent in the third quarter, said Brewin Dolphin Ltd. BP Plc (BP/) may be receptive to a combination with BG to challenge Royal Dutch Shell Plc (RDSA) as Europe’s largest oil company, said N+1 Singer Ltd.
“BG has very attractive assets,” Jane Coffey, who manages 12 billion pounds ($19 billion) as head of U.K. equities at Royal London Asset Management, said in a telephone interview. The firm owns BG shares. “There is a big danger that some opportunistic big company will come along and get the assets very cheaply.”
Neil Burrows, a spokesman at BG, declined to comment on the possibility of a sale. Patrick McGinn, a Houston-based spokesman for Exxon, declined to comment when asked if the company is interested in acquiring BG. Sheila Williams, a London-based spokeswoman at BP, also wouldn’t comment on whether BP would be interested in a combination with BG.
Finlayson, 56, succeeded Frank Chapman as CEO this month at the end of the company’s worst annual stock performance since BG was formed in 1997, when former state gas monopoly British Gas Plc split.
Chapman, during his 12-year tenure, had taken the company’s market value from about 9.8 billion pounds to more than 53 billion pounds in 2011. That success was halted on Oct. 31 when BG said production won’t grow this year because of project delays in the North Sea, U.S., Brazil and Egypt. The stock fell by a record 14 percent in one day. BG then said in November it would reduce supplies of LNG to clients in Chile partly because of less fuel available from Egypt.
The decline left BG trading yesterday at 15.5 times its profit in the last 12 months, compared with its 10-year high price-earnings ratio of 30.3 in April 2011, data compiled by Bloomberg show.
Even though that’s more expensive than the 10 other oil and gas producers based in North America and Europe with market values exceeding $50 billion, Peter Hutton, an analyst with RBC Capital Markets, said one could argue that BG is “now cheap” and would be less dilutive to a buyer’s valuation multiples.
“BG will have been on M&A radars across the industry,” London-based Hutton wrote in a Jan. 18 report. “Management change may be taken as opportunity to initiate discussion” or make the company weaker against a hostile approach.
A potential bidder may be interested in BG’s 6 billion barrels of oil and gas resources in Brazil, worth about $6.80 a barrel, according to Hutton. Valuing the proven reserves elsewhere at $4 a barrel, an acquirer would be getting BG’s LNG business “for free” at the current market value, he wrote.
BG this month started pumping oil at the Sapinhoa field off Brazil, one of the “Big Five” discoveries including Lula, Iracema, Iara and Carioca in the pre-salt Santos Basin. The company also is investing more than $20 billion to produce its first Australian LNG next year and plans to more than double its marketing volumes to about 30 million tons a year in 2020.
While output will stagnate this year, the company has a history of finding new energy sources. In 2011, BG discovered enough oil and natural gas to replace 251 percent of what it pumped from wells, a so-called reserve-replacement ratio that was the highest of any producer with a market value exceeding $50 billion based in North America or Europe, according to data compile by Bloomberg. The median for the group was 122 percent.
Theepan Jothilingam, a London-based analyst at Nomura Holdings Inc., estimates BG’s net asset value is about 1,929 pence a share, assuming an average oil price of $95 a barrel. BG’s stock closed 42 percent less than that yesterday, a bigger discount to the value of its underlying assets than any other European integrated oil company, Jothilingam wrote in a Jan. 18 report.
Today, BG shares rose 2.3 percent to 1,145 pence in London, the highest closing price since Oct. 31 and the biggest gain in the FTSE All-Share Oil & Gas Producers Index.
Exxon is the major integrated oil company best positioned to acquire BG with the least amount of dilution to its valuation, according to Iain Armstrong, an analyst at Brewin Dolphin in London. The $414 billion company trades at 11.3 times this year’s projected earnings, compared with BG at 12.6 times, according to data and analysts’ estimates compiled by Bloomberg.
The Irving, Texas-based producer needs to secure assets for growth after it said in November that third-quarter oil and natural gas output fell to the lowest in three years, with declines in all of its areas of operation except for Africa and Australia. Exxon CEO Rex Tillerson budgeted about $100 million a day last year on projects and pursued acquisitions to help reverse the longest stretch of quarterly production declines in 13 years.
In addition, OAO Rosneft’s agreement to buy BP’s Russian venture TNK-BP will displace Exxon as the world’s largest publicly traded oil producer by volume.
“If Exxon bought BG, it would be back at the top of the pile again,” Armstrong said.
China Petroleum & Chemical Corp. (600028), the state-run energy company known as Sinopec (386), and Cnooc Ltd. (883), China’s largest offshore oil and gas explorer, would have the firepower to buy BG as the nation seeks resources to feed its expanding energy needs, said Armstrong. China National Petroleum Corp., the nation’s largest energy producer, also may be among interested buyers, said Simon Hawkins, a London-based analyst at N+1 Singer Ltd.
Representatives for the three Chinese companies didn’t respond to phone calls outside normal business hours requesting comment.
China, the largest oil-consuming country after the U.S., accounted for 11 percent of global demand in 2011, according to BP’s Statistical Review of World Energy. The International Energy Agency last week boosted its 2013 global demand forecast for oil because of stronger growth expectations for the Asian nation.
Hawkins estimates that BG would command a 30 percent premium, which would equate to about 1,450 pence a share, or a total of about 57 billion pounds, including net debt.
Takeover valuation wouldn’t be an issue because “China will just finance it anyway,” given that all the companies are backed by the government, Armstrong said.
A BG combination with BP, still recovering from the 2010 spill in the Gulf of Mexico, may be another possibility, according to Hawkins. London-based BP, which has a market value of $139 billion, has itself been considered a potential takeover target because of its diminished valuation relative to reserves, earnings and output, people familiar with the company’s strategic thinking and its potential acquirers said in November.
A tie-up would create a company better able to rival Exxon and Shell, Hawkins said, and BG management could take the lead.
“If they want to do a reverse takeover, that is quite an interesting idea,” said Hawkins, who knew Finlayson when they both worked at Shell in Nigeria in the 1990s. If Finlayson “is able to prove himself very quickly to investors and get the institutional support, then that sort of aggressive thing is possible.”
Investec Securities Ltd.’s Stuart Joyner said BG’s expensive multiples will deter buyers and the company won’t pursue a takeover of its own while Finlayson sets a plan for addressing production growth issues. The new CEO is most likely to sell some of the Brazilian fields, which account for about 40 percent of the company’s market value, to help boost capital, the London-based analyst said.
“They have to farm down Brazil,” Joyner said in a phone interview. “They are huge fields -- not without their complexities -- very good, with very high margin per barrel, so they are quite attractive.”
While selling some of the Brazil assets is the most probable outcome as the new CEO sets a strategy, the recent stock plunge has left BG cheaper than its underlying value, said Zac Phillips, a London-based analyst at Fox-Davies Capital Ltd.
“I was quite surprised when BG fell by as much as it did,” Phillips said. “It made it very vulnerable to a takeover.”
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