Market Report: BG energised by Shell bid rumours and upgrade

A round of bid rumours and some positive broker comment turned the spotlight on the energy group BG yesterday. Midday rumours suggested the rival energy giant Royal Dutch Shell, which was down 29p at 1,988p, may soon unveil an offer for the company, which rose by almost 4 per cent to 1,283p before easing back to 1,243p, up 9p, by the close.

The talk, which has done the rounds before, bore few details. "It's one of those rumours that comes and goes," said one trader. "It's possible, but a lot of attention is being focused on the Bernstein upgrade," he added, referring to a report on the company by analysts at Sanford C Bernstein.

Bernstein, which moved the stock to "outperform" from "market-perform", said that BG was set to benefit from a tight market for the liquefied natural gas market, or LNG. The broker added: "Given that BG has traded off subsequent to its latest Origin bid, we believe the downside is now in the stock price, and that upside could be realised as the market digests a strong quarter of LNG results, and Santos Basin discovery commentary starts again."

Elsewhere, weak oil futures hurt Cairn Energy, which closed down 4p at 3,218p. The stock avoided deeper falls thanks to Goldman Sachs, whose analysts advised investors to buy the stock, citing the company's exposure to the oil price and acquisition potential.

"We believe that acquisition speculation and continued high prices will act as catalysts," the broker said.

Goldman also weighed-in on Venture Production, which was weaker by 39p at 850.5p yesterday. "We are downgrading Venture to Neutral (from Buy) following recent strong performance," the broker said. "We would prefer to leverage commodity prices through Cairn Energy, which has more upside on our estimates and, in our view, a greater attractiveness as a takeout target."

Overall, the banking sector proved a drag on the FTSE 100, which closed down 48.5 points at 5,708.4. An update from HBOS, which was down 6.9 per cent or 22p at 296.75p, dampened sentiment across the sector, pushing Alliance & Leicester down by 5.73 per cent or 18.5p to 304.25p and Barclays lower by 3.22 per cent or 10.5p to 315.75p. In its update, HBOS predicted house prices will fall as much as 9 per cent this year and revealed fresh writedowns on its Treasury Trading Book.

The FTSE 250 was also down and lost 88.2 points to 9,446.6.

On the FTSE 100, a surprise surge in UK retail sales, which according to the Office for National Statistics grew by 3.5 per cent in May, drove investors into the fashion retail chain Next, which rose by 14.5p to 1,012p. Market watchers had expected the headline figure to reveal a slight slowdown. "There retail sales figures are absolutely astounding," said Howard Archer, the chief UK and European economist at Global Insight. "The data seems totally at odds with the survey evidence and with consumer confidence standing at an 18-year low." The news also helped the Argos owner, Home Retail Group, which was firm at 212.25p, up 0.75p.

The combination of strong metals prices and positive broker updates drove the mining sector, where Anglo American led the way, up 119p at 3,518p.

Investec contributed to the stock's strength. "We are forecasting earnings per share of $2.86 for the first half of 2008, a 31 per cent uplift on the first half of 2007," the broker said, raising its target price to 4,900p from 4,400p. Investec also raised its earnings forecasts, and target price to 2,900p, for BHP Billiton, which rose by 25p to 1,950p.

On the FTSE 250, Credit Suisse gave a boost to Petrofac, which rose by 18p to 706p after the broker raised its target price to 800p from 682p. "[Petrofac's West Don and Don Southwest fields in the North Sea] will give the group new, more direct exposure to the Brent oil price," said Credit Suisse.

Also on the upside, Redrow reversed course and climbed by 16.5p to 154.25p, to second place on the mid-cap leader board, after Citigroup upgraded the stock to "buy" from "sell" in a housing sector review. The broker set a "buy" rating on Bovis Homes, which was up 3p at 345.75p.

"New assumptions [are] getting close to [the] worst-cast scenario – with price now assumed to drop 20 per cent and volumes to be down close to 50 per cent by end 2009. Both of these scenarios are comfortably worse than the early 1990s recession," Citi said.

Punch Taverns was down 22.25p at 363.75p after Morgan Stanley reduced its target price to 640p from 800p. "The share [price] is likely to remain very volatile and could drop significantly further in an environment where investor focus on balance sheets is intensifying," the broker said.

On AIM, Coffeeheaven International rose by 4.35 per cent or 1.75p to 42p following speculation that FTSE 100-listed Whitbread was mulling an offer. By the close, Whitbread was down 5p at 1,217p.