April 28, 2014 8:34 pm

BG loses chief but keeps his strategy

Bg

The main reaction to news of Chris Finlayson’s resignation as chief executive of BG Group on Monday was one of utter bafflement.

The company seemed happy to see him go, even though they were sticking with his strategy. And he had fulfilled one of the main tasks facing him in the job: keeping BG’s megaprojects in Brazil and Australia on track.

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True, Egypt was a mess. The company declared force majeure on its Egyptian gas exports in January after the authorities diverted much of it to the domestic market. But post-Arab Spring instability in Egypt was hardly his fault.

“The board seems happy to usher him through the exit while reiterating its commitment to his strategy,” says Neill Morton of Investec.

What is clear is that the departure of Mr Finlayson, who took over as CEO from Sir Frank Chapman just 15 months ago, has capped the most torrid period in BG’s history. The company has trimmed its production guidance four times in the past two years and issued a profit warning in January, citing project delays and political turmoil in Egypt.

And those problems are persisting. On Monday, BG said falling production in Egypt meant its oil and gas output this year would be at the lower end of its estimated range. Shares slid by as much as 6.8 per cent.

Defenders of BG put the problems down to growing pains. Over the past 10 years, it has expanded rapidly from a midsized oil explorer to the UK’s third-largest producer of oil and gas after Royal Dutch Shell and BP.

It has much brighter prospects than some of its rivals, with a portfolio boasting interests in the most exciting spots in the oil patch, such as the Brazilian “pre-salt” and Australia. Credit Suisse estimates its production will rise from just over 600,000 barrels of oil equivalent per day in 2013 to just under 1.2m boe/d by 2020.

In May, Mr Finlayson unveiled a new strategy that was broadly welcomed by investors and was followed by a steady improvement in BG’s share price. BG, he said, would rein in capital expenditure, divest low-margin businesses and focus on a core group of 10-15 assets. Rising revenues from the megaprojects would boost income, help the company move into positive cash flow by 2015 and potentially allow for a one-off return to shareholders next year.

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But in a statement issued on Monday, BG said more was needed. Andrew Gould, BG’s chairman, who will now run the company until a permanent replacement for Mr Finlayson is found, said it needed to accelerate returns to shareholders.

A person familiar with the company’s thinking spelt out what that means. BG needs to move to “more active portfolio management”, divesting more assets and bringing in more partners to share the financial burden of running its huge projects.

The company “can’t do everything at once”, he says.

It’s a problem that has deep roots in BG. Many in the oil industry were puzzled when it embarked on a $15bn liquefied natural gas project in Australia without a partner.

The concern seemed justified in 2012 when the company announced a $5bn cost over-run. It later sold stakes in the project to China’s state-owned Cnooc for nearly $2bn.

Mr Finlayson’s departure could lead to a similar change in Brazil: BG may now sell down its interests in the pre-salt. In its statement on Monday, the company said it was “reviewing its operational, investment and portfolio management plans”.

But stepping up divestments could prove hard. There are currently $387bn of oil and gas assets up for sale around the world, according to consultancy Wood Mackenzie: the market is flooded.

Meanwhile, Mr Finlayson’s departure “raises inevitable questions about structural issues in the management of BG”, says Peter Hutton of RBC Capital Markets. The company has, after all, had four different chief financial officers in the space of four years.

Some say such instability was inevitable after the departure of Sir Frank, a widely-respected CEO who presided over BG’s rapid growth. But some of the company’s problems have their roots in his tenure.

Charles Whall, co-portfolio manager at Investec Asset Management, says under Sir Frank, BG consistently overestimated its future production. “It was obvious to most of us they couldn’t deliver on their promises,” he says.

“There’s been an issue about management credibility generally, in terms of communication with the City, and the operational disappointments,” says one top-ten shareholder. “But it’s hard to know how much of that is Chris Finlayson’s fault.”

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