Market Report: BG Group fired up by expected gas price hike

BG Group, the UK-based energy giant, soared as investors were awakened to the prospect of a 50 per cent hike in gas prices yesterday.

According to UBS, an expected rise in the cost of coal, coupled with the cost of carbon under limits imposed by phase three of the EU Emissions Trading Scheme in 2013, will effectively halve the current level of coal-based power output in the EU.

UBS reckons that liquefied natural gas or LNG is the mostly likely source for the lost volumes of coal. And the amount of the stuff required will likely be very large: analysts at the bank estimate that by 2013 Europe will need extra gas equivalent to the amount consumed by a country the size of Italy, adding 13 per cent to global LNG demand. Increased demand will in turn impact the price of gas.

"We believe the only viable solution would be for Europe to raise prices substantially in order to bid LNG volumes away from the traded market, particularly from the US, but this may require prices over 50 per cent higher than our current forecasts," UBS analysts said.

They added: "BG has a global LNG business ... We estimate there could be an 11 per cent uplift to our BG NAV [net asset value] if gas prices rose by 50 per cent."

The assessment drew investors in to the company's stock, which rose by 39p to 1,164p, claiming second place on the FTSE 100 leader board.

Overall, the FTSE 100 lost 24.6, or 0.4 per cent, to 5,891.3. The London benchmark was hurt as the banking sector veered off the rally path and Wall Street opened lower, depressed by worse-than-expected economic data. The US Labour Department said that the number of first-time claims for unemployment benefits rose by 38,000 to 407,000 in the week ending 29 March. The markets had been anticipating a rise of around 4,000.

The FTSE 250 also softened, shedding 194.8, or 1.9 per cent, to 10,177.2.

On the FTSE 100, banking stocks were hurt by weak sentiment. Goldman Sachs, whose analysts maintain a cautious stance on the sector, contributed to the decline. "UK banks continue to face two major issues – one structural, the other cyclical," the broker said. "While UK banks appear cheap relative to recent history, they are yet to reach floor valuations both in relative and absolute terms in our view."

The negative assessment hit Lloyds TSB, which was downgraded to "sell" from "neutral" by Goldman. The bank slumped 20.5p to 462.75p, claiming sixth place on the FTSE 100 loser board. Barclays was down 17p to 487p, while Alliance & Leicester lost 21.5p to 536.5p. HBOS shed 18.5p to 574.5p.

Marks & Spencer remained unsettled by the row over Sir Stuart Rose's elevation to the post of executive chairman. The retailer's shares lost 6p to 392.5p.

British Airways was also weak, losing 9.25p to 239.25p, after the market learnt that traffic at the air carrier fell by 2.8 per cent in March.

On the FTSE 250, BBA Aviation was down 10p to 150p after the company's Signature Flight Support business ranked poorly in a new survey of US airport refuellers or fixed-base operators.

Analysts at Panmure Gordon, who maintain a "sell" recommendation on the stock, said: "We believe that it [the news] is significant considering market share dynamics in times of fuel-price stress (is it offering good value?), future capex requirements (is the network suffering from under-investment?), business-model robustness (can it continue to charge the high prices and offer a lesser service), and lastly when considering the justifiable premium for its valuation rating."

Real estate investment trusts also attracted some negative broker sentiment.

Lehman Brothers, while downgrading the sector to "neutral", said: "Stabilising property prices without rental growth is like cycling a bike with one pedal – it is difficult to balance. UK leases behave like frozen cash and are lower risk in the retreat from structured products. Rents, however, are going ex-growth with the City of London and retail warehouse markets softest, in our view."

Lehman downgraded Great Portland Estates to "2-equalweight" from "1-overweight", helping to send its share price down by 25p to 518p.

Derwent London was also downgraded, to "2-equalweight from "1-overweight", and lost 61p to 1,499p. Brixton, despite being upgraded to "1-overweight" from "2-equalweight", was down too, losing 2.25p to 332.75p.

On AIM, Kimcor Diamonds shone after selling a 31.4 carat diamond for $226,080 (£113,390), or $7,200 per carat. The diamond was recovered from the company's Nooitgedacht mine in South Africa. News of the sale took Kimcor up by almost 13 per cent or 0.5p to 4.375p.