Analysts Downgrade BG Group

Equity analysts have lowered the fair value estimate for BG Group following the reduction of their price estimates for oil and natural gas

Allen Good 17 March, 2015 | 3:39PM

We are changing our fair value estimate for BG Group (BG.) to £12 per share from £14 after reducing our mid-cycle price estimates for oil and natural gas. Our valuation methodology incorporates three years of strip prices, with terminal prices defined by these longer-term forecasts. We currently believe the appropriate mid-cycle prices for oil and natural gas are $75/barrel Brent, $69/barrel West Texas Intermediate, and $4 per thousand cubic feet Henry Hub.

Our new fair value estimate also includes reduced capital costs and operating expenses, based on our expectation for falling oil-service fees.

Our previous estimate for U.S. natural gas was $5.40/per thousand cubic feet. The reduction was primarily driven by three factors: services cost deflation driven by oil price declines, continued production growth in low-cost areas like the Marcellus Shale, and ongoing efficiency gains in higher-cost areas. Despite meaningful demand tailwinds – our forecast calls for U.S. natural gas demand to grow more than 25% through 2020 – we believe sufficient low-cost natural gas exists to meet these elevated demand levels at prices below our previous mid-cycle estimate.

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About Author

Allen Good  Allen Good is a senior stock analyst covering the oil and gas industries.

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