BG Group - Brazilian Bonanza

BG Group (LON:BG.) has long stood out from other Western energy majors due to its ability to significantly increase future production.  The company’s partnership with Brazil’s national oil giant Petrobas and the new discoveries in the Santos Basin, offshore Brazil, are a perfect illustration of how this success is being achieved.  Such is the size of the new finds Petrobas has conducted the largest ever capital raising, at US$70bn, in late September in order finance the extraction of the oil.

In BG's latest quarterly update (three months to September 2010) the group estimated that the gross equivalent economically recoverable resources in the Santos Basin stood at 10.8 billion barrels of oil equivalent (boe). This marks a 34%, or 2.7 billion barrel increase, on the previous indicative range.

In October BG and it partners also completed two new successful appraisal wells in the Santos Basin. These are the eighth and ninth consecutive successful wells on the Tupi oil field, which is in the Santos Basin and is expected to produce 100,000 boe per day and up to 177 million standard cubic feet of gas per day.

Future output growth is also set to come from Australia with BG set to invest US$15billion, its biggest investment to date, in a Liquefied Natural Gas (LNG) project. The investment in the Queensland Curtis LNG project follows Federal Government approval and should ensure that exports commence from 2014.

Total gross discovered coal seam gas reserves and resources amount to 17.3 trillion cubic feet (tcf) equivalent to more than 2.9 billion boe. What is impressive is that it has taken BG just 3 years from first entry to then get the project sanctioned. Buyers already signed up for the LNG include Chile, China, Japan and Singapore at up to 9.5 million ones per annum.

It is worth remembering that liquid natural gas for export may face future competition from domestic gas supplies. This is because transportation costs for gas increase its cost while unconventional sources of gas such as shale may increase domestic production. 

Nevertheless, countries such as Japan and Singapore look to remain net energy importers due to their high population densities and lack of domestic energy sources. We will also see strong energy demand growth as emerging markets grow and increased pressures to move away from dirtier fossil fuels will increases the attractiveness of gas.

The growth opportunities for BG have ensured that capital expenditure guidance for the next two years has increased from US$16.5billion to US$18.5 billion. Accordingly, over the next ten years production growth looks set to come in between 6% and 8% which is much higher than the low single digits managed by the other oil majors.

Turning to the third quarter results and quarterly operating profit rose by 21% while earnings per share rose by 27%. The strong performance was largely due to a 43% increase in LNG profits.   

However, the strong result in LNG is not expected to continue into the fourth quarter. This is because the performance was due to BG picking up business by sending LNG to Asia and South America when supply from Qatar faltered.

On the basis of current earnings BG is expensive relative to other major Western energy groups. However, the growth prospects and large energy discoveries underpin BG's superior prospects. The importance of LNG to BG is also a potential weakness as more unconventional gas deposits are discovered but it also provides an opportunity.

This report was produced by Senior Research Analyst, Aamer Nawid.