“Oh Lord, it's hard to be humble, when you're perfect in every way” could be BG's corporate slogan. Shares in the UK's third-largest oil and gas company rose only slightly on Wednesday, despite a solid set of first half results.
Strong upstream profits were a given. But muted unit cost inflation, despite industry pressures, testified to BG's innate strengths. Still, sector expectations have now caught up with reality. Unlike the previous quarter, BG met rather than stomped on consensus forecasts. Larger rival BP was similarly in line on Tuesday.
BG's production growth has been predicated on a string of big discoveries earlier this decade. Near-term targets look safe. However, based on the current pipeline, growth will probably slow sharply after 2007. Rising exploration charges are evidence of BG's gradual shift from project developer to hunter-gatherer. It is still planning around £1bn of capital expenditure next year. Investors will probably have to wait until 2006 for a detailed update. However, exploration risk, and the prospect of higher upstream spending, is increasing. Despite zero gearing, only a modest special payout of cash is likely this year.
Yet BG now trades at a double-digit percentage premium to its peers on enterprise value to debt-adjusted cash flow multiples, while yielding less in terms of dividends and free cash flow. Given the deteriorating risk profile, the height of that pedestal doubtless owes much to BG's perennial perception as being the perfect takeover target.