BG hits the skids after cutting production guidance

BG Group shocked the market on Tuesday morning by cutting back production guidance as a result of a number of delays to project start-ups.

BG Group shocked the market on Tuesday morning by cutting back production guidance as a result of a number of delays to project start-ups.

The group said production rose 5% year-on-year in the third quarter of 2012 as new projects ramped up, but various factors mean that the group now expects full-year production will be just 3% higher than in 2011, while 2013 output is not expected to show any growth at all.

Delays, delays, delaysProduction levels have been hit by the previously announced shut-down of the non-operated Elgin/Franklin fields in the North Sea and the group's strategic decision to scale back drilling in the USA due to low natural gas prices. On top of that, the deferral of the start-up of the Jasmine field in the North Sea to 2013 will put a lid on production growth, while BG has also adjusted its 2013 plans to accommodate an extended sub-sea tie-in schedule for Brazil's Sapinho and Lula NE wells.

"We have also reflected lower production in Egypt where the Phase 7 compression project has been less effective than expected in arresting reservoir decline. In aggregate, these factors are expected to result in 2013 volumes being broadly in line with 2012," revealed Sir Fank Chapman, Chief Executive of BG.

The production guidance shocker overshadowed third quarter figures which were released two days earlier than expected.

Net income of $1,189m were in line with market expectations - Charles Stanley had predicted $1.12bn - and up from $1,021m in the third quarter of 2011.

The Exploration & Production (E&P) division saw operating profit surge 13% to $1,331m from $1,183m the year before, ahead of Charles Stanley's forecast of about $1.25bn.

This performance was surpassed by the Liquefied Natural Gas (LNG) division, which grew profit by 24% to $767m from $620m. The group said full year operating profit is likely to be at the top of the guidance range of $2.6bn to $2.8bn range.

Both divisions were trumped by the Transmission & Distribution arm, which saw revenues rise 52% to $198m from $130m.

Earnings per share (EPS) climbed 165 to 35 cents from 30.1 cents a year earlier.

Revenue and other operating income rose 4% to $5,588m from $5,397m the year before.

Cash generated by operations of $2,701m decreased by 1% as higher operating profits were offset by adverse working capital movements, primarily resulting from the timing of LNG cargoes.

Action to cut debtAt the end of September, the group's net debt was $10,974m and the gearing ratio was 25.3%. The average maturity of the group's gross borrowings remains at around 17 years.

Debt is set to come down, however, as a result of an agreement with China National Offshore Oil Corporation (CNOOC) for the sale of certain interests in the Queensland Curtis LNG (QCLNG) project in Australia for $1.93bn and the sale of liquefied natural gas (LNG) from BG Group's global LNG portfolio.

Broker Seymour Pierce however noted that the group currently has an asset divestment programme to reduce net debt exposure, and thinks the sudden announcement of the disposal "would suggest that the disposal of their Australian LNG interest was forced upon them rather than a strategic decision."

"With the company also confirming that production in 2013 would now be in line with this year, tempering market expectations, investors are unaware as to how the company will maintain current earnings. This is compounded by the company's significant investment in gas related exploration with diminishing spot prices," Seymour Pierce's Sam Wahab wrote.

"In view of BP's consensus beating third quarter results this week, the market may see their shares as representing better value than BG's going forward," Wahab concluded.

The market seemed to agree. BP's shares were up in the first two hours of trading while BG's plunged by one-eighth to 1,163p.

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