Oil for the next six years quoted at $88 a barrel lends credibility to estimated Net Present Value (NPV) of US$22 a share for buy-recommended BG Group plc (OTCQX:BRGXF), including its share of discoveries offshore Brazil. Development of the frontier finds, 21% of NPV, requires confidence in a high future oil price.
Pointing in that direction, the trend for oil price is up as evidenced by current quote above the 40-week average. Meanwhile, six-year natural gas is struggling to follow oil with the current quote falling 4% below the 40-week average of $6.68 a million Btu. Natural gas is half of NPV for BG, which is uniquely concentrated downstream -- liquefaction, transportation, distribution and trading, as well as upstream -- production.
Though natural gas price is under pressure, Chief Executive Frank Chapman explains that BG has contractual protection that limits the downside. In remaining operations (26% of NPV), oil volumes apparently are likely to be higher in the fourth quarter after an unexpected dip in the third quarter. Finally, since BG’s McDep Ratio is not as low as European peers, we would weight BG stock less than average in its group.
Originally published on November 17, 2009.