Jeremy Warner's Outlook: BG Group makes a meal out of great story

Pension headache - Hedonistic inflation - Brussels or London?
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BG Group may or may not be the great company its share price seems to suggest, but if it is to give the outside world any real way of knowing, it needs to sharpen up its presentational skills. Barely a tenth of the size of BP, its results conference yesterday lasted twice as long. The chief executive, Frank Chapman, speaks a language that few even in the oil industry would properly understand. Why talk about future prospects when instead you can bang on about the "opportunity set we are hoping to mature" with the help of "embedded expansion options"?

BG Group may or may not be the great company its share price seems to suggest, but if it is to give the outside world any real way of knowing, it needs to sharpen up its presentational skills. Barely a tenth of the size of BP, its results conference yesterday lasted twice as long. The chief executive, Frank Chapman, speaks a language that few even in the oil industry would properly understand. Why talk about future prospects when instead you can bang on about the "opportunity set we are hoping to mature" with the help of "embedded expansion options"?

Perhaps because BG ranks a distant third to BP and Shell in the UK oil and gas sector. Mr Chapman must therefore believe he has to try harder to succeed. He styles the company as a go-go growth business, not some stodgy old yield stock, but you have to wonder whether this is more out of necessity than choice. BG's dividend last year paled against the paybacks from BP and Shell.

Formed five years ago when British Gas did the splits for the second time and demerged its UK gas transmission network, BG has made a pretty decent fist out of the legacy North Sea assets it inherited. Remarkably, it has managed to halt the decline in North Sea production by exploiting what were once seen as marginal fields. But since the long-term trend is for UK output to fall, BG has been forced further and further afield to the shores of Trinidad, Egypt and even Iran.

On the face of it, the strategy is reaping dividends (if not of the kind shareholders like to see). Unlike many of its peers, BG is adding new sources of oil at a faster rate than it is pumping the stuff. On the stringent SEC measure, it is well ahead of Shell and BP on reserves replacement with a ratio comfortably above 100 per cent. Shell, given its own reserves disaster, can only look on in envy. Yet it is hard to believe that BG has a long-term or even medium-term future as an independent E&P company. Perhaps that was what Mr Chapman was really doing yesterday - burnishing BG's credentials ready for the day when one of the oil majors comes knocking. But then the management gobbledygook makes it hard to tell quite what his game might be.

Pension headache

Just when you thought legislators might finally have got the message that the more regulation they pile on to final salary pension schemes the less likely employers are to want to provide them, along comes another nasty little shocker to make companies still soldiering on with such pension arrangements further doubt their sanity.

From today, the amount a pension scheme can claim against the sponsoring company, even if the company is insolvent, will be based on the full cost of buying annuities and deferred annuities for all members, rather than as before, up to the less demanding Minimum Funding Requirement (MFR). In an insolvency, the effect would be to spread the value of liquidated assets more thinly, which would mean less money for other creditors, including bondholders. It scarcely needs saying that the capital markets will charge accordingly for this extra liability.

By way of example, John Ralfe, an independent pensions consultant, cites British Airways, whose two pension funds are fully funded under the MFR but would assume under the new legislation a liability of £3.2bn, being the total cost of buying out all the present pensions promise. Nobody is suggesting BA is likely to become insolvent, but none the less, investors, lenders and other creditors are bound to take this potential new liability into account. Another example would be Invensys, whose financial position is arguably more precarious.

Curiously, this rather important amendment to the pension rules did not form part of the recent Pensions Act, but without parliamentary debate was quietly bolted on as an after thought.

It could be argued that the new rule is good news for companies with final salary pension schemes, as it ought to reduce the level of calls on the new Pension Protection Fund, which all such schemes are obliged to pay for. Most companies will simply take the view that it's better to be out of this minefield of obligations and liabilities altogether.

Hedonistic inflation

"Hedonic regression" may sound like a form of drug rehab, but according to the Office for National Statistics (ONS) it is in fact a methodological improvement in the way the rate of inflation is calculated. From next month the ONS will allow for changes in the quality of laptop computers and pre-pay mobile phones in the way it calculates the Retail Prices Index (RPI), so that, for instance, if improvements in technology allow you to get twice the computing power in a new laptop for the same price as the old one, that would count for anything up to a 50 per cent reduction in prices.

Any "improvement" to the numbers of this sort should be treated with the utmost suspicion, for it is ridiculous to argue that a generalised improvement in the quality of goods means they are getting cheaper. The ONS points out that hedonic regression is already used in the Consumer Price Index (CPI), the measure of inflation targeted by the Bank of England, so it makes sense to apply the same methodology to the other indices. Yet RPI is the inflation rate most commonly used for the indexation of a great swathe of taxes and benefits. It is also the index used for pay bargaining and inflation-proofed gilts. Any attempt to massage it down therefore looks questionable.

Still, no matter. The Governor of the Bank of England has pronounced that the new hedonism doesn't amount to a fundamental change in the the index, which would be materially detrimental to holders of index linked gilts. Possibly not, but it does add to the confusion over what constitutes the real rate of inflation. Out of the array of different numbers announced yesterday for January - 1.6 per cent, 2.1 per cent, 3.1 per cent and 3.2 per cent - which best reflects your experience? Answer: none of them, for they are all just averages which hardly anyone will fully conform to. Your own personal rate of inflation depends on your own personal spending patterns.

Most of us are already acutely aware of the rather worrying fact that while the price of imported goods keeps on going down, the price of most domestically produced goods and services is motoring away at a pace of knots. What then happens if the pound starts to head south? Yet another reason why today's quarterly Inflation Report from the Bank of England is unlikely to bring much comfort on interest rates.

Brussels or London?

It is all but inevitable that the two competing bids for the London Stock Exchange will face some kind of second-phase competition investigation. The question of the moment is where? John Vickers, the chairman of the Office of Fair Trading, must decide by the end of the week whether to pack the whole thing off to Brussels, or keep it for investigation here in the UK by the Competition Commission. The evidence suggests he's quite swayed by the arguments for giving jurisdiction to Brussels. Last time Deutsche Börse came knocking, he stated publicly that he thought, "arguably", this was the most appropriate forum for investigation.

Personally, I don't see it. Indeed I find it hard to imagine a case more suited to national adjudication than the future of Britain's national stock exchange, with its near monopoly of trading in UK-listed companies and its vital importance to the future of the City as a financial centre. Callum McCarthy, the chairman of the Financial Services Authority has already alluded to the difficulty of ensuring that the listing rules remain in the national interest if London equity trading is in some way offshored.

To that concern must be added the need to preserve adequate standards of corporate governance and accountability by the new owner to the LSE's users. These matters cannot and won't be properly safeguarded in Brussels, whose priority is to further the aims of the single European market with the creation of single European stock market.

jeremy.warner@independent.co.uk

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