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:

 

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.

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

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »