Foot down on the gas gives BG scope to grow

No need to retire McCarthy & Stone
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The Independent Online

The gas and oil producer BG is to miss this year's output target because of problems with a project in Kazakhstan. The general view in the City, though, was that BG should be forgiven for the shortfall, since it has delivered a remarkable growth story for the last few years.

The gas and oil producer BG is to miss this year's output target because of problems with a project in Kazakhstan. The general view in the City, though, was that BG should be forgiven for the shortfall, since it has delivered a remarkable growth story for the last few years.

BG Group is what is left of the privatised British Gas, shorn first of its retail arm, which is now called Centrica, and, in 2000, of Transco, the gas pipelines business that has since merged with National Grid.

Frank Chapman, the chief executive, insisted the company was not "embarrassed or ashamed" of the glitch in Kazakhstan. There is contamination at the new Karachaganak gas pipeline in the central Asian republic, leading to a loss of several weeks of production. Reporting third-quarter results yesterday, the company said it would come "within 2 per cent" of its 2003 target of 440,000 barrels per day. Remember that production in 2000 was 280,000 bpd. The company pledged in 1999 that it would boost production by 16 per cent a year, right out to 2006. Mr Chapman said the company remained on track to reach 530,000 bpd by 2006.

The production issue highlights how BG's projects tend to be big, so one going wrong has a significant, if temporary, impact. Up to now, BG's luck has been in, and many credit Mr Chapman with an extraordinary ability to hit wells.

He rightly stresses that what distinguishes BG from competitors is that its results are based on increased output, not benefiting simply from higher gas and oil prices - though obviously that is a strong positive for BG too. Third-quarter profit was up 55 per cent to £307m as both fuels have stayed dear as a result of the instability in the Middle East.

There are still plenty of investment opportunities before the company and it should have the financial firepower to exploit them, with $1.2bn (£720m) soon to be deposited in the corporate bank account from the sale of BG's interest in another Kazakhstan oil field. This money is not likely to be returned to shareholders. The market is keen to hear how it will be spent to drive production after 2006.

BG shares, which closed down 1.25p at 276p yesterday, tend to trade at a premium to the sector because of its output growth record and the frequent speculation that it will receive a bid. On a forward multiple of 15 and with good prospects, BG is worth holding.

No need to retire McCarthy & Stone

The sheltered housing builder McCarthy & Stone apparently has a licence to print pension books. The wonder is not that it is doing so well but that competitors are failing to emerge. The chairman and chief executive, Keith Lovelock, says that the mainstream housebuilders have tried to break into the market but got their fingers burned.

Yet the ageing population speaks for itself: more than a fifth are over 60 and the proportion of owner occupiers among the elderly is predicted to grow from 67 per cent in 1997 to 79 per cent in 2011.

More than 100,000 private specialist retirement houses and flats have been built so far. The potential market is five times that figure. By the time those units have been built, with McCarthy putting up about 2,250 a year out of 3,000, the elderly population will have ballooned further.

McCarthy & Stone increased its pre-tax profits by 54 per cent to £116m in the year to August. The final dividend of 9.8p makes a total 13.7p, an increase of 20 per cent.

Two clouds obscure the sunset. One is a computer disaster at a major supplier. Mr Lovelock will not name names but he says that "structural products" were held up and will mean fewer homes coming on to the market in the current first half. These delays have now been resolved and compensation is being discussed.

The other is the 13 per cent stake held by the former chairman John McCarthy, ousted in August after failing to put together a family buyout. The company says it has no indication of what he intends to do.

We were premature in advising readers to take profits in April when the shares were about 375p. They shot up another 15p to 515p yesterday and those who stayed now have an even better chance to lock in their gains. However, the 2.7 per cent dividend yield, with the prospect of more to come, makes a strong case to hold.

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