It takes more than great assets to make a great business, and reputations built up over years can be shattered in days. For the best part of a decade and a half, BG Group PLC was once an oil major in the making. The company was the stock market's pampered pet, with an enviable portfolio of oil and gas assets in some of the world's most exciting new hydrocarbon provinces. The romance is now clearly over. Having removed the chief executive, Chris Finlayson, after only 16 months at the helm with no obvious replacement, BG Group looks a bit more like the Marie Celeste than a supertanker. Stock market pundits are speculating about break-up values and bets are being made on which bloated giant, ExxonMobil or Royal Dutch Shell, might have the cash and chutzpah to do the dirty deed.
Even after the share price damage caused by a series of profit warnings over the past year and another in January, BG Group still looks like an expensive way to buy a piece of the global oil and gas business. At the current share price it is worth £39-billion ($71.9-billion), some 15 times this year's earnings, substantially more than the ratings of the major European oil companies. The logic of of the premium is said to be in the huge opportunities in the portfolio, including a quarter share in some of the giant oilfields offshore of Brazil, and a big piece of Australia's coalbed methane resource which it plans to turn into LNG. The "gusher tomorrow" scenario prompts some analysts to value the business at £18 per share compared with the current price of less than £12. But that really means doubling the number of barrels that BG produces daily from its current level of about 600,000 and, after the latest warnings, no one is expecting much progress this year or even next year.
It's all about how you transform a major oil and gas exploration company into a super-major oil and gas production company. Or to spell it out, when does BG Group break the glass ceiling and achieve output in excess of 1 million barrels per day, a level at which it can begin to generate the cash flows that can finance the very large infrastructure investments it needs ? Arguably, the top table of the international oil industry has diminished over time, not enlarged. The seven sisters of the 1960s have dwindled to a couple of Standard Oil descendants, Exxon and Chevron, plus three Europeans – BP, Shell and Total. Of course, that does not include the state-controlled energy companies, such as Gazprom, Petrobras and Rosneft, but rather than compete for assets, these entities instead exploit a national endowment. In a competitive market for both financial and natural resources, the Famous Five of the private oil sector struggle just to stand still.
BP is currently producing more than five times as much oil and gas as BG Group, but the veteran company is worth little more than twice as much as the new boy. That exposes the fundamental problem of the big oil companies: how do you keep filling up the draining tank while at the same time expanding the business. The cost of building big oil and gas infrastructure is colossal and in some cases may be approaching levels that are prohibitive. Notorious projects, such as the Kashagan oil field in the Caspian where some $40-billion has been invested by the consortium without producing a single barrel, may never generate a real return. The super-majors invest hundreds of billions each year but are failing collectively to raise their oil and gas output. It is the huge cost of building deepwater platforms and LNG factories and the inevitable delays that postpone and ultimately, diminish the anticipated return.
Small wonder that some investors were losing patience with BG Group's deferral of output targets and its reluctance to bring in partners to defray risk and cost. The traditional model for a successful exploration company is to sell at the point at which production is imminent. BG Group was, at its inception, a rump of overseas businesses spun off from British Gas, and went through different strategic incarnations. At one point it owned stakes in gas utilities in Latin America which were to form the basis of a global integrated gas business. Then it found lots of oil offshore of Brazil and some investors hoped that BG Group would have the courage to sell or de-merge the huge oil finds at a profitable opportunity. But the grandeur of scale appears to have befuddled management. In the end, big is not better, it is just a lot more difficult.