3 Reasons Why BP plc Is Better Value Than BG Group plc

BG Group plc (LON:BG) has fallen hard, but does it offer better value than BP plc (LON:BP)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BP (LSE: BP) (NYSE: BP.US) shares are trading at their lowest levels since May 2012, and are down by nearly 15% from their July peak. BG Group (LSE: BG) (NASDAQOTH: BRGYY.US) has fared even worse, sliding by nearly 30% this year.

After such major declines, both companies seem likely to offer value to investors looking for a recovery buy — but is this true, and if so, which company offers the best value?

The simple answer?

Using conventional metrics such as forecast yield and P/E, the answer might seem obvious — BP is clearly cheaper than BG:

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

 

BP

BG

2015 forecast P/E

9.3

13.0

2015 forecast yield

6.2%

2.4%

2015 forecast earnings growth

+1.8%

-1.0%

Price to book value

0.95

1.4

However, when it comes to resources companies, these basic financial metrics don’t always tell the whole story.

The big problem with BG over the last few years has been that its success as an explorer has not yet been matched by its ability to develop and generate cash from its assets. In theory, this means that BG’s earnings have not reflected the potential of its assets.

On the other hand, BP has proved very able to generate cash from its assets, both by maximising production and by selling them. The problem for BP is different: a multi-billion payout for the Macondo disaster continues to hang over the firm, while its decision to buy a 20% stake in Russian giant Rosneft no longer looks quite so clever, at least in the near future.

A different view

The core value of a resources company is defined by two things: its assets and their ability to be commercially exploited.

Assets that have proven commercial viability are known as reserves, and by comparing the valuation of BG and BP’s proved reserves, we can get an alternative view on which company offers better value:

 

BP

BG

Proved oil reserves (million barrels)

9,882

1,532

Proved natural gas reserves (billion cubic feet)

45,975

12,041

Total proved reserves (million barrels of oil equivalent)

17,544

3,538

Enterprise Value/boe of proved reserves

$5.16

$10.83

Source: Company annual reports

I have to admit I was surprised when I calculated these numbers: I really thought they would be closer.

On this basis, BP continues to look much cheaper than BG — and this conclusion is backed up by the company’s own discounted cash flow valuations for their proved reserves:

 

BP

BG

Market cap

£75bn

£31bn

Discounted future cash flow valuation for proved reserves

£80bn

£18bn

Source: company annual reports

Again, it’s clear that BG’s own figures suggest it is overvalued, relative to BP. However, I should point out that these figures were calculated assuming oil prices of $108. The picture could change sharply when they are recalculated for lower oil prices at the end of this year — but my money is still on BP as a strong buy.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »