Investment Column: BG powers ahead as oil majors stutter

Wolfson; McBride
Click to follow
The Independent Online

Our view: Buy

Share price: 1470p (+30p)

There is one group of people for whom rocketing fuel prices are good news: investors in energy companies such as BG. But there was more to like about the company's results than that yesterday when it delivered an impressive "proved" reserve replacement ratio of 223 per cent. In other words, BG is finding much more oil and gas than it is pulling out of the ground. Production is also set to increase at a time when the oil majors are struggling to pull off the feat.

Of particular note in yesterday's statement was that BG expects to beat its previous long-term target of production growth of 6 to 8 per cent next year, thanks to higher than expected output in the US, Brazil and Australia. BG raised its forecast of daily production from Brazil by 2020 from 400,000 barrels of oil and gas to more than 550,000 barrels. By 2015, it also expects to produce 190,000 barrels equivalent of US shale gas a day, compared with its previous target of 100,000.

BG's total reserves and resources increased by 1.7 billion barrels of oil equivalent to 16.2 billion, representing 69 years of production at 2010 levels. Pre-tax profits increased to $6.7bn (£4.3bn) from $5.7bn on revenues of $17.2bn, up from $15.4bn. Revenue growth was slower in the fourth quarter but that is nit-picking, really. The final dividend, of 21.6 cents, was also up by 10 per cent.

BG was one of our 10 companies to follow for the year, so yesterday's announcement more than justifies our faith. Its shares have run up strongly recently, and at 17 times 2011 earnings (yielding just 1 per cent) are on a premium to oil majors such as Shell.

But the success of BG's exploration and production operations suggests that that premium is well deserved and the shares can go on from here, not least because it is very hard to see energy prices falling at the moment on the world's markets. Buy.


Our view: Hold

Share price: 272p (-12p)

This column has recently thrown its weight behind the UK-listed semiconductor industry, although in the past we had held reservations about Wolfson Microelectronics, predominantly after its chips failed to make the leap from Apple's iPhone 3GS to the iPhone 4.

Yet the company has proved us wrong, and over the past year its share price has more than doubled. All the same, Wolfson ran into a sticky patch this week. The industry fundamentals (the rising sales of smartphone handsets) remain compelling, but its full-year numbers disappointed the market. Its performance worried the City because its profits margins were hit by problems with suppliers. Wolfson's sales of $45.8m were slightly ahead of consensus forecasts but, after the problems with supply, underlying operating profits of $1.3m were way off the consensus expectation of $2.4m.

The company continues to launch new designs, with 30 products released last year, and this growth will help to lift revenues. However, the valuation looks quite rich. Panmure's multiple of 28.5 times forecast full-year earnings for Wolfson is some way off the valuation of its larger rival, ARM Holdings, and so too are its opportunities for growth, but we would still hold.


Our view: Sell

Share price: 139.6p (-8.6p)

McBride, the maker of own-brand household cleaning and personal care products, had a day to forget. Its interim results were in line with expectations, but the shares tumbled after it issued a warning about rising raw materials prices and a "weak retail environment". It said these contributed to a 31 per cent fall in pre-tax profits to £15.5m for the six months to 31 December. McBride's admission that materials costs could be £7m higher in the second half of the year spooked investors, despite an impressive client list that includes Tesco, Morrisons and Asda.

Half of its cost pressures come from surfactants, such as palm kern oil, which are used for liquid products. McBride talked of "short-term" pressures but is unclear how protracted these may be. To tackle its cost base, it touted a further restructuring of its supply chain, which will lead to an exceptional charge of £20m this year, with annual benefits of about £11m.

In the UK, McBride is likely to face continuing subdued demand and fierce competition but the long-term future is bright, given its impressive client base and expansion opprotunities abroad. However, given the challenges, its shares are fully priced at 12.2 forecast earnings, so sell.