City wisdom has it that profit warnings often come in threes. BG Group (LSE:BG) (NASDAQOTH: BRGYY.US) has delivered two in the last two years, leaving its share price 26% lower than it was in March 2012.
Has the liquefied natural gas (LNG) pioneer now turned the corner, or is there a third disappointment to come for BG shareholders?
I’ve taken a look at three of BG’s key financial metrics — commonly used by debt-rating agencies — to see if I can spot any problems.
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1. Operating profit/interest
BG’s debt has doubled since 2009, as spending on its big projects in Brazil and Australia has peaked ahead of production start-up. Operating profits have weakened over the same period, so do they still meet the critical test of covering interest payments by at least two times?
Operating profit / net finance costs
$3,667m / $560m = 6.6 times cover
BG’s operating profits fell by 40% last year, but still covered the firm’s interest costs by 6.6 times. I’m comfortable with this, given BG’s positive production outlook for 2015/16.
2. Debt/equity ratio
Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value. I tend to use net debt, as companies often maintain large cash balances that can be used to reduce debt if necessary.
At the end of 2013, BG reported net debt of $11.3bn and equity of $31.9, giving net gearing of 35%.
This is higher than most of the larger oil majors, but is not a big concern for me, as new production due to come on stream over the next couple of years should boost BG’s cash flow, enabling it to repay some of this debt.
3. Operating profit/sales
This ratio is usually known as operating margin and is useful measure of a company’s profitability:
Operating profit / group revenue
$3,667m / $19,192m = 19.1%
BG’s operating profits were lower last year than at any point since 2008, and its operating margin fell to 19.1%. However, the firm did generate free cash flow of $975m, which was just enough to cover its dividend — a sign of good financial management, in my view.
Is BG Group a safe buy?
The last two years have been painful for BG shareholders, but have been a necessary part of the firm’s transition from growth company to major producer, in my view. I think the outlook for BG is beginning to look more positive, and could soon merit a buy.
