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We initiate a buy recommendation on the common shares of BG Group plc (OTCQX:BRGXF) for long-term participation in oil and gas production, liquefied natural gas (LNG) and new discoveries offshore Brazil. The stock offers unlevered appreciation potential of 27% to a McDep Ratio of 1.0 and levered appreciation potential of 31% to Net Present Value (NPV) of $22 a share.

Oil and gas reserves and production have expanded widely from the company’s original UK base when it was part of the British government natural gas utility. Global expansion extends to Brazil where BG has 25% of the Tupi oil discovery by Petrobras (NYSE:PBR), which has 65%. Our assessment of the prospective value of Tupi and subsequent discoveries is proportional to our estimated value for Petrobras.

The unproven discoveries are one among four main components of NPV. The other three segments contribute current cash flow with profits unusually strong in Downstream consisting mostly of LNG shipping and trading. Finally, pointing to expected oil price recovery, futures prices for the next six years averaged near US$71 a barrel recently.

Originally published on May 5, 2009.