Investment Column: Keep hold of profitable BG Group

Life's a gas for BG Group at the moment. The natural gas group is producing more, selling it for higher prices, and consequently enjoying surging profits. And it is ploughing those profits into a string of projects that will mean greater production, greater diversification and still greater profits in the second half of the decade. No wonder the stock market can't get enough of the shares, which are nudging record highs.

Life's a gas for BG Group at the moment. The natural gas group is producing more, selling it for higher prices, and consequently enjoying surging profits. And it is ploughing those profits into a string of projects that will mean greater production, greater diversification and still greater profits in the second half of the decade. No wonder the stock market can't get enough of the shares, which are nudging record highs.

BG is what is left of the privatised British Gas, shorn first of its retail arm - now called Centrica - and, in 2000, of Transco, the gas pipelines business that has since merged with National Grid. Gas is growing in popularity as a fuel and demand is increasing at a much faster pace than for oil, because gas is cleaner and because there is increased capacity to transport it in liquified form.

BG has been reducing its reliance on the North Sea and investing heavily in liquified natural gas (LNG). A new LNG receiving terminal in Lake Charles in the US is already exciting investors, two years before it comes on stream. At least the company has a pretty solid track record of delivering the production increases and new projects that its respected management promises.

Meanwhile, the outlook for fuel prices continues to look good from BG's point of view. Gas prices are less volatile than oil, but are likely to stay high as economic activity and oil market disruption continues.

We've not discovered a hidden gem here. The stock market is well aware of BG's attractions, and the shares have been chased up to a level that makes them look expensive when measured against the company's earnings and cash flows over the next couple of years. The benefits to come later in the decade can justify the price, though, and investors ought not rule out a takeover by one of the world's biggest oil and gas majors, even at the current level. The stock would be punished if there are more immediate hiccups, though, and for that reason our recommendation is not buy, but hold.