Gas resists the pressure

BLUECHIIP

A Triumph for the consumer, yes, but the demolition job wrought by its regulator on BG plc - as British Gas is now known - is surely the final blow for the accident prone and much reduced giant.

But as any BG shareholder is no doubt aware, the share has been on an almost vertical ascent from the dark days of a year ago, when it languished at 123p.

It would seem that the market believes the future is not so bleak as was feared. Indeed, the shares, now 217.5p, added another 6.5p after the report came out.

Yet what the MMC has imposed is pretty drastic, at first sight, and on any second reading. Essentially, the MMC confirmed the earlier proposal by Ofgas. The value of the pipelines operated by BG's Transco subsidiary has been slashed to pounds 11.6bn, from the pounds 17bn in the report and accounts.

BG revenues will be cut by 5 per cent in the current financial year and 7 per cent next year. This means pounds 184m off sales this year and, depending on how you calculate it, an average annual loss of pounds 380m until 2002.

As predicted by the City, the dividend will be savaged, and is likely to be halved this year, from the 18.125p gross it paid in 1996.

It is not all bad. BG wanted as high a value as possible attributed to Transco, but reducing its value also cuts the annual depreciation charge. It may sound like accounting trickery, but the benefit to BG's bottom line will be tangible - around pounds 300m.

In fact, analysts look to be raising their dividend estimates. There is a consensus for a net dividend of around 8p - up from previous estimates of 5p to 7p.

If that is so, BG yields 4.6 per cent - higher than the market, although somewhat lower than the 6 per cent on offer from most other utilities.

Alternatively, look at the asset value of the company. Capitalised at pounds 9.7bn, the underlying value of the business may be far more. Exploration and production could be worth pounds 4bn. Add on pounds 11.6bn for the pipeline, subtract debt, and you have a figure of pounds 12bn - a 20 per cent upside on valuation grounds alone.

The MMC report provides some much-needed certainty. And the potential for further swathes of job losses should boost profitability.

There is still the matter of a windfall tax in the Budget on 2 July, though this should be a relatively minor blow.

The shares are a weak buy.