Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at BG Group (LSE: BG) (NASDAQOTH: BRGYY.US)
What is the sustainable competitive advantage?
Despite being a world leader in the exploration and production of natural gas reserves, it would appear as if BG does not a competitive advantage over its peers in the industry.
In particular, it is apparent that BG and its peers are now jumping over each other, trying to build the best LNG distribution terminals, as well as transportation and production facilities.
For example, in Australia, BG and two of its peers have all built similar pipeline networks and related infrastructure within the same region at enormous cost, rather than sharing assets.
What’s more, this aggressive competition is proving costly for BG, forcing the company to spend more than it can afford on capital projects, just to stay in the game. Indeed, on average during the past four years, BG has been spending $8.4 billion a year on capital projects, while cash generation from operations has averaged $6.4 billion a year.
Unfortunately, even after this high capital expenditure, over the last five years, BG’s revenue has fallen a compounded 8%. In addition, over the past year, the company’s net profit margin has fallen from 38%, to 33%, excluding exceptional items.
Furthermore, competition is driving down the amount that BG can command for its services and the company’s return on assets is falling. For example, although BG spent $10 billion on capital projects during 2012, the firm’s return on assets remained unchanged from the return achieved during 2011.
Long-term outlook?
As with all oil & gas companies, one of BG’s most limiting factors is the lifespan of the company’s hydrocarbon reserves. However, at the end of 2012, BG had two-and-a-half years of proved gas reserves at current production rates and more than 40 years of proved oil reserves at current production rates.
Additionally, the company’s LNG shipping and marketing activities, which accounted for 40% of revenue during the second quarter of this year provide a steady, long-term income stream for the company.
That said, BG’s year-on-year shipping and marketing revenues, fell 5.3% during the second quarter of this year as competition intensified and costs grew.
Foolish summary
Currently BG does not have the size or financial fire power to be considered a buy and forget share. The company is spending heavily on capital projects but is achieving negative returns and competition in the industry is putting pressure on margins.
So overall, I rate BG Group as a poor share to buy and forget.
More FTSE opportunities
As well as BG Group, I am also positive on the five FTSE shares highlighted within this exclusive wealth report.
Indeed, all five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by the Fool as “5 Shares You Can Retire On“!
Just click here for the report — it’s free.
In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
