This report is prepared to analysis the financial statement of BG Group plc which is one of the emerging leaders in natural gas. We have taken into consideration the peers of the company which also operate in the UK in the same industry. They all use the accounting methods established by IFRS (International Financial Reporting Standard).
The report carries synopsis of the company’s profile with its business strategies along with the latest developments of the industry. The report also includes extensive financial analysis, competitors’ analysis and non-financial analysis in terms of strength, weakness, opportunity, and threat. Apart from this, it also contains performance of company’s stock against its competitors.
The income statement has shown a decrease in revenue growth by 18.7% from the previous year, which is due to global economic downturn. Overall, BG Group has in-fact nearly doubled its revenue over the past 5 years i.e. from 2005 to 2009.
In the sales comparison with its competitors, the firm reported less net sales but it recorded a higher net income demonstrating a better performance in terms of efficiency.
BG Group has been aiming to achieve their objectives through mergers and acquisitions as observed from the analysis of the balance sheet, increasing its assets by more than £14600 million and rise in debt by £6559 million so as to supply the demand of the emerging gas market during the last five years.
Company has shown remarkable performance in all the ratios as compare to the same indicators of company’s peers. However, compare to results in previous year the performance in 2009 has been deteriorated in some areas due to global economic downturn. In 2009, the company’s ROE and ROA was 15.96% and 8.25% respectively. Examining current and quick ratio, company has sufficient liquidity to meet its obligations. Solvency and efficiency ratios are also better than industry and its competitors. The price ratios have increased over the year with EPS being 64.5 pence in 2009.
In order to obtain the company’s volatility, we have calculated Beta. Taking into consideration S&P 500 as market index and the historical stock prices for the previous five years (from December 1, 2005 to December 1, 2010), the analysis showed a beta of 0.368 denoting less risk but less reward at the same time. According to the last trade it has reached its maximum value of 1277.50 pence, increasing its share price by 0.83%, both good signals of the company’s stability performance.
Finally relying on non-financial analysis, our analysis of BG’s group operations in the last five years has revealed that despite the global economic downturn the company’s operating performance has shown increases in total reserves and resources.
The following report aims to encompass both financial as well as non-financial performance of BG Group, a company operating in the energy sector. As concern in the world’s energy market has grown, natural gas has been the general preference of the international market in the past years. This factor makes BG’s financial statements interesting to examine.
For the purpose of our report we have identified two competitors in the same industry Centrica Plc. and National Grid Plc.  We have tried to look at all the aspects of the company and we have included relevant information in the study of the company’s performance from 2005 to 2009.
Our income statement report has been carried out to study the trend on revenue and sales using time series and common size analysis. Assets, liabilities and equity have been identified in the balance sheet in order to reveal contained information about its stability. Operating, investment and financial activities have been analyzed in the cash flow statement.
BG Group’s ratio analysis is aimed to illustrate how efficient the company is using its resources in order to generate income. We have structured our report in the following manner: the company’s profitability at the outset; liquidity has been analyzed as the next point followed by the BG’s solvency and efficiency. Price ratios have also analyzed to know about the financial strength of the company.
In the last part of our report we have identified Strengths, Weaknesses, Opportunities and Threats (SWOT) facing the organization in order to identify the different factors that can affect the entity’s objectives in the future. In the end we have given the sound conclusion to our report.
We have considered BG’s annual public financial reports as the major sources of data for our analysis. It is available at company’s website: www.bg-group.com
BG Group is an energy sector operator, playing a vital role as natural gas company in the international energy market.
The corporation’s headquarters are based in based in Berkshire, UK, the company operates in 27 countries over five continents. It was created in 1997 following the demerger of British Gas plc but it wasn’t until 1999 that BG Group plc adopted its actual name.
BG Group carries out operations in four different sectors: Exploration and Production (E&P), Liquefied Natural Gas (LNG), Transmission and Distribution (T&D), and Power Generation (P&G). The company has been able to develop and supply the demand of the new sources of energy due to the international expansion of BG Group.
BG Group is committed to ensure the success of its objectives in the long term performance on the basis of principles of ethical conduct.
During these years the company has increased the value of their shareholders, thus acting with integrity and meeting the company’s objectives.
1986. The British Government decided to sell off British Gas as part of its going privatization plan. A new company was formed, British Gas plc.
1997. British plc was disbanded into two new companies, Centrica plc and BG PLC.
1999. BG plc was restructured, leading to form a parent company, BG Group plc.
2000. BG Group plc was demerged with Lattice Group to form National Grid Transco plc.
2005. National Grid Transco plc was given a new names as National Grid plc to provide an unambiguous identity across all its operations.
– £10213 million in annual revenue, and a profit of £3773 million in 2009
– It has about 6000 employees working around the world
– More than 60% of management is based internationally despite BG’s headquarters being in the UK
-BG Group possesses gas terminals off the coast of Britain and the US, it provides about 50% of all gas displaced from the Atlantic to the Pacific Ocean in 2007
– It already owns reserves and resources to meet future growth ambitions, in 2009 the company risen its assets by a further 10%
– According to IEA, with gas being the most widely used fuel, the global demand for natural gas is expected to increase by 1.5% per annum until 2030
– In the last five years BG group has been one of the major suppliers of LNG in world’s largest gas market USA.
– It’s been identified as a sustainable leader by Dow Jones Sustainability Index, FTSE4Good and Goldman Sachs for its corporate performance.
Revenue analysis is one of the important analyses to know about the company’s sales activities and profitability. Following table shows the sales and sales growth of BG Group between 2005 and 2009:-
Table 1: Growth percentage of total revenue
Figure 1: Total Revenue (in £ millions)
The above graph shows that total revenue of BG Group have increased from £5612 million in year 2005 to £12566 million in year 2008. This is because of the exceptionally high commodity prices and acquisition of Queensland Gas Company Limited, a leading Australian coal seam gas company in October 2008. However, the sales revenue in year 2009 has been decreased by 18.73% which dropped down to £10213 million. This is mainly because of the fall in commodity prices of oil and gas. In 2009 there was a decline of 37% in Brent oil prices and 53% decline in Henry Hub gas prices. Moreover, the global economic conditions had adversely affected the demand energy sector in some of the key markets of BG Group. For year 2010 the total group revenue for Q3 of 2010 is $4500 million (£2886 million) as compare to $3667 million (£2352 million) in Q3 of 2009. We also noticed a hike of 22.7% in the group revenue of 2010 as compared to year 2009 which was due to the higher realized oil, liquids and international gas prices.
BG Group’s main competitors are companies like Centrica plc, National Grid Plc., Royal Dutch Shell Plc., BP Plc., to name a few. However, for the purpose of fairness in comparison we will analyze the performance of BG Group plc with that of Centrica plc and National Grid plc. The reason for selecting these as comparators is that both of these companies are engaged in the same sort of business activities and they maintain their financial accounts in British Pounds (£) which provides fair comparison with BG Group.
Table 2: BG Group’s revenue comparison with its competitors during 2009
Figure 2: Comparison of sales in 2009
In 2009, BG Group’s sales were lower as compare to its competitors. Also, BG group experienced the higher negative sales growth as compare to its competitors. The sales of National Grid decline by 10.47% in 2009 against BG’s negative sales growth of 18.73%. On the other hand the sales revenue of Centrica increased by 2.90% in 2009. Despite lower sales growth the net profit of BG Group (£2264 million) was higher than net profits of National Grid (£1389 million) and Centrica (£856 million). The reason is that Centrica’s cost of sales remained higher (almost 80%of total revenue) during 2008 and 2009. The table also reflects the net profit margin (21.23%) and operating margin (37.81%) of BG Group is better than Centrica and National Grid in financial year 2009-2010.
Thus, BG Group’s performance was better than its competitors in terms of net income as compare to its peers.
The financial statements of BG Group are prepares according to International Financial Reporting Standards (IFRS) as adopted by European Union that requires the company to make judgments and assumption during the preparation of financial statements. We will do analysis of income statement, cash flow statement and balance sheet to measure the financial health of BG Group.
The table below shows the common size income statement of BG Group during 2005-2009:-
Table 3: Common size Income statement of BG Group
Figure 3: BG Group’s common size income statement analysis
From the common size income statement we analyze that the proportion of operating cost to total revenue of BG Group was higher (63.47%) in the year 2009. This was due to the significant increase in exploration activities in Brazil, expansion of group’s portfolio via alliance with EXCO resources in USA and acquisition of Pure Energy Resources in Australia which increased the selling, administration and general expenses. This was further aggravated by the rise in the commodity prices due to which operating profits declined from 41.69% (£5239 million) of total revenue in 2008 to 36.94% (£3773 million) in 2009. The fall in interest income and a rise in interest expense further led to a decline in the net profits to 22.17% due to a significant rise in all the expenses.
Table 4: Percentage change in Income statement of BG group
As discussed earlier, revenue of BG Group declined by 18.73% in 2009 in comparison with previous year. There operating profits also declined by 27.98% which further led to fall in net profits by 28.13% in year 2009.
The below table shows the common size cash flow statement of BG Group:-
Table 5: Common-size cash flow statement (as a percentage of revenue)
Figure 6: Common size cash flow fluctuations
The cash flow from operating activities is one of the major sources of the company’s finances. The above data depicts that BG Group’s operating, investing and financing cash flows from 2005 to 2009.
The cash generated by operations in 2009 decreased by 22% to £4895 million (£6274 million in 2008) mainly due to lower commodity prices. The net cash inflow from operations increased till 2008 because of increase in non-cash transactions and trade payables. However, its proportion to total revenue declined to 34.70% in 2009 from 34.94% in 2008. Trade and other payables increased significantly up till 2008 when it was £3632 million but in 2009 it reduced down to £2592 million.
Cash outflow from its investing activities increased from £62 million in 2005 to £4981 million in 2009. This was due to increased capital expenditure since 2005. In 2009, BG Group purchased the Pure Energy Resources Limited in Australia for. Similarly In 2008, company spent £464 million on capital expenditure on the acquisition of Queensland Gas Company. There was also a rise in payments made in acquisition of property, plant and equipment and intangible assets to £4328 million (£2796 million in 2008). It was 41.3% of group’s total revenue in 2009 as compare to 21.9% in 2008.
Cash flows from financing activities includes a net cash inflow of £1131 million in 2009 (£643 million outflow in 2008). It also includes net proceeds of £1842 million from the issue of new borrowings (2008 £300 million) which rose to almost 18% of the total revenue as compare to 2% in 2008. However, there were also rise in net outflows of dividends paid to minorities £36 million (2008 £35 million) and net interest paid £106 million (2008 £19 million) during 2009.
Figure 7: Cash Flow fluctuations
We can analyze the financial performance of BG Group by making assets and liabilities analysis. Below is the assets side and liabilities size analysis of BG Group during 2005-2009:-
Table 6: BG Group’s common size assets
Figure 8: Total Assets of BG Group Plc. (2005-2009)
The above chart shows that the total assets of BG group increased significantly to £26282 million in 2009 (£11605 in 2005). This was due to the continuous expansion of group’s LNG business throughout the period under consideration. During 2009, BG Group made an asset swap with BP the Armada, Everest and Lomond fields which further increased the assets acquired by the company.
From the common size balance sheet analysis, it is observed that the proportion of non-current assets to total assets was highest at 80% in the financial year 2009 mainly due to increase in the proportion of property, plant and equipment, goodwill and other intangible assets. However, there was a declining trend in the proportion of current assets which remained at 20% in 2009 as compare to 33% in 2007. This was caused by a subsequent fall in cash & cash equivalents, trade receivable and other current assets such as commodity contracts and derivative financial instruments.
Figure 9: Comparison of structure of assets (Financial year 2009)
Table 7: BG Group’s common size liabilities
Figure 10: Total liabilities and equities of BG Group Plc. (2005-2009)
The above chart depicts that the amount of current liabilities increased from £2509 million in 2005 to £6488 million in 2008 because of the higher trade and other payables (£3632 million). However, in 2009 this amount reduced down to £5148 mainly due to the reduction in trade payables and other current liabilities which includes the tax liability and commodity contracts.
After analyzing the common size liabilities, it is scrutinize that the proportion of long-term borrowings declined until the year 2008 (12.9% in 2005 to 7.59% in 2008) but in 2009 it again grew up to 11.84%. The main reason of this change was the group’s obligation to finance lease in respect of LNG ships and infrastructure and the reduction in effective post-swap interest rates between 0.2% to 11% in 2009 ( 4% and 17% in 2008). However, total debt remained low in 2009 (45.2%) as compare to 2008 (48.4%).
The structure of liabilities also suggests that the group financed its business operations through both debt and equity though the proportion of equity remained more than 50% over the last five years. As compare to 2008, in 2009 BG Group’s dependence on debt (45%) has been reduced down marginally implying that the equity financing (55%) has been increased.
Figure 11: Comparison of structure of liabilities
The analysis of financial ratios is most important measure of company’s financial strength. We will analyze BG Group’s financial performance in respect to its profitability, liquidity, solvency, efficiency and management ratios.
The following data represents the profitability situation of BG Group Plc. during the last five years.
Table 8: Profitability ratios of BG Group
The net profit margin of BG Group shows a decreasing trend over the last five years. It declined from 24.88% in 2008 to 21.23% in 2009 because of the lower earnings caused by lower international oil & gas prices during global economic recession. However, the group performed better than industry average of 13.10% and competitors Centrica and National Grid whose net profit margins in 2009 remained lower at 4.53% & 15.68% respectively. Similarly, the group’s operating margin also declined significantly due to a rise in operating costs.
The Return on Assets (ROA), Return on Capital Employed (ROCE) and Return on Equity (ROE) are other important ratios for analyzing a company’s profitability. The investors normally look for ROA of at least 5%. Throughout the analysis we observed that the ROA of the group lie between 8%-14% which is higher than industry average (3.69%), Centrica (4.34%) and National Grid (3.18%) that means BG’s assets are more productive than the competitors. Similarly, the group is more capable of generating higher returns on the capital employed as compare to its competitors. The ROCE was highest (33.29%) in the year 2006, however by the end of the year 2009 it fell down to 18.27% due to lower profit margin in the same year.
On the other side, the group did not perform better in terms of return on shareholder’s equity. Generally ROE ratio between 15% and 20% is regarded as the attractive level of quality investment by financial analysts. Although BG Group’s ROE ratio was better than industry average of 6.39% but its competitors in the market are more efficient in generating profits from shareholder’s equity. The group’s ROE ratio in 2009 was 15.96% as compare to Centrica Plc. (20.42%) and National Grid Plc. (33.08%).
Figure 12: BG’s profitability ratio comparison with competitors (2009-2010)
Thus BG Group has better profitability condition than industry average and its competitors Centrica Plc. and National Grid Plc.
The following data represents the liquidity situation of BG Group Plc. during the last five years.
Table 9: Liquidity Ratio of BG Group
The current ratio of BG Group increased initially (1.47 times in 2006) but in the later periods it dropped down significantly. By the end of year 2009 it fell down by almost 31% to 1.01 times better than industry average of 0.65 times. This was because current assets fell more than the current liabilities. Current assets declined mainly due to less availability of cash & equivalents and short-term derivative financial instruments. The financial analysts usually expect the current ratio of any company should be at least more than one but the ideal ratio is 2 times (2:1). But because of the nature of the oil and gas industry, any current ratio of more than 1 can be considered as ideal. The comparable companies Centrica and National Grid also had the similar ratios. Centrica Plc had the current ratio of 1.05 times which is nearly the same as BG Group. However, the current ratio of National Grid Plc was less than 1 at 0.77 times in the year 2009.
The quick ratio of the company was sound till the end of 2007 when it was 1.21 times which gradually decreased down to 0.92 times by the end of year 2009. The main causes of this decline was reduction in trade & other payable, cash & equivalents and commodity contracts and derivative financial instruments on one hand and significant increase in the short-term borrowings from £275 million in 2007 to £717 million in 2009. Again it was better than industry average of 0.42 times as well as National Grid (0.72 times) and almost equal with Centrica (0.99 times). This means that BG Group was able to pay its short-term liabilities out of its most liquid assets.
By measuring the cash ratios the creditors analyze the amount to debt given to consumers. As seen before due to the lower cash & equivalents and higher short-term liabilities the cash ratios also remained very lower which was less than 1 throughout the five years. The similar results were noticed for the comparable companies of the same industry.
Working capital is also important to see the operational efficiency of the company. Working capital of BG Group remained very low level which signifies that the group is not efficient to pay its current liabilities out of its available assets.
Figure 13: BG’s liquidity ratio comparison with competitors (2009-2010)
The following data represents the solvency position of BG Group Plc. during the last five years.
Table 10: Solvency ratios of BG Group
Solvency measures how efficient a company is to meet its long-term obligations to its creditors. The debt-equity ratio of 3:1 is generally considered as ideal. BG Group’s debt-equity ratio was increasing till the end of year 2007 (0.52 times or 52%) but gradually it fell down to 0.45 in 2009 implying that the group’s was efficient to finance its assets through its own capital rather than dependence on debt. Centrica and National Grid experienced higher debt-equity ratio implying that they had very high dependence on borrowings.
The debt ratio of BG Group had also reduced down slightly from 0.71 in 2007 to 0.61 in 2009 implying less dependence on debt. This ratio was better than National Grid (0.89). However, Centrica’s debt ratio (0.67) was almost similar to BG Group in 2009.
Total debt to capital ratio of BG Group declined marginally to 0.83 in 2009 which means that the 83% of the group’s capital structure was financed with long-term debt and remaining 17% from the current liabilities. This was because of the increase in the amount of short-term liabilities in 2009 by almost 63% as compare to 2008 when only 6% of the group’s capital was financed by short-term liabilities. This situation was better than the competitors Centrica and National Grid which have higher debt to total capital ratio.
We should also analyse the percentage of group’s assets that were supported by debt financing and for this we will look at total debt to total asset ratio. This ratio fluctuated between 0.30 and 0.35 over the last five years and was better than those of Centrica and National Grid. Similar was the situation with debt to total equity where the group showed better results than its competitors.
Figure 14: BG’s solvency ratio comparison with competitors (2009-2010)
These ratios were better than group’s competitors Centrica and National Grid as they experienced higher level of solvency ratios.
The following data represents the efficiency position of BG Group Plc. during the last five years.
Table 11: Efficiency ratios of BG Group
From the table above it can be analyzed that BG Group’s inventory turnover decreased every year. By the end of year 2009, it fell down by 50% to 19.68 (39.52 in 2008) mainly because of lower international oil and gas prices which effected the sales revenue. The competitors experienced better results in terms of higher inventory turnover which shows BG Group was unsuccessful in inventory management practices.
The group’s receivable turnover, however, remained constant throughout but was lower than its competitors Centrica and National Grid. The group’s efficiency in collecting its receivables improved till 2007 when the days receivables outstanding reduced by 9 days from 108 days in 2005 to 99 days in 2007 and then increased by 5 days in 2009. The payment made to suppliers by BG Group remained on an average 3 times in a year over the desired periods. The competitors however make early payments to their suppliers which indicate that BG Group is in efficient in building sound relationship with its suppliers.
The group’s total asset turnover declined marginally to 0.39 over the last five years but it was better than industry average of 0.52 and that of national Grid 0.32 and nearly similar with Centrica. Fixed asset turnover declined marginally to 0.48 in 2009 but was better than National Grid 0.36. On the other hand current asset turnover declined significantly due to fall in current assets in 2009 and this ratio was unsatisfactory as compare to the competitors.
Figure 15: BG’s efficiency ratio comparison with competitors (2009-2010)
The below table represents the management ratios of BG Group from 2005-2009:-
Table 12: Management ratios ratios of BG Group
Figure 16: BG’s management ratio comparison with competitors (2009-2010)
The table above shows that all price ratios of BG Group are better than its competitors and industry averages in 2009. The EPS of BG group was 64.50 pence as compare to its competitors because of higher net income generation. BG also experienced better P/E ratio (19.64) than the industry average and its competitors. The price to cash flow ratio although remained lower than industry averages but was better than the competitors. Moreover, BG’s price to book ratio was also noticeably higher than its industry average implying the higher growth of company’s shares. The last trading price of BG group’s share was 1267 pence which was also higher than the industry’s average share price and the price of competitor companies.
Chart forBG Group PLC (BG.L)
From the above chart we analyze the stock performance of BG group, which is listed under London Stock Exchange with total market cap of £43,065.73 million (as on Dec 6th, 2010- Reuters) under the symbol of BG.L. The chart signifies rise and fall in prices of stock and the percentage variations duration last 5 years. As per the diagram BG group stock price was highest between years 2008-2009, however there was a rise in wholesale gas prices due to which BG group gained a price hike 35% in year 2008. Slowly due to recession prices of gas fell down between years 2009-2010. As we see in diagram there is a cliff being developed? Since comparing the BG group stock prices with S&P 500 during last 5 yrs. BG group position is quite better after economic downturn and compared to its peers.
Figure 17: BG’s stock beta comparison with competitors
According to financial terms the Beta of a stockA is a figure showing in relationship to its return in accordance of financial market. Considering the above figure, graph reflects that BG group has Beta of 0.368. In CAPM (Capital Asset Pricing Model) such figures suggest that BG group security price is less volatile compare to market price. Since it concludes that BG group stocks are less risky but at the same time the return to investors will also be lower.
Chart forBG Group PLC (BG.L)
Some of the strengths, weaknesses, opportunities and threats of BG Group are mentioned below:-
Table 13: SWOT analysis of BG Group.
BG Group is one of the leaders in oil and gas supply within UK and with a largest customer base at international level.
Brand Power – BG Group has gained its image in terms of loyalty and trust in Oil & Gas market.
Diversified service portfolio in exploration & production, liquefied natural gas, transmission & distribution and power generation.
Strong Financial/resources position.
Lack of communication due to weak organization culture – Weak organization culture develops communication gap in management which leads to mishap at production sites.
Weak communication strategy – Strategy developed by BG Group is less communicating between higher and lower management which give rise to fluctuation in production and supply.
BG group has developed a position in countries like Brazil, India, USA etc. This strategy will help BG in developing its business in different economies.
It is predicted that there will be increase in demand more by 20% in 2014 and this will further increase the level of demand to 130 billion cubic meters in 2020. The company should grab this opportunity from such rising demand.
There is shift in focus for renewable energy due to environmental concern and price hike.
Political upheaval in business operation of major markets.
Emerging threat – N Power, Scottish Power, EDF Energy and other utility supplier companies.
Natural gas reserves are declining.
Ecological/Environmental laws & policy on wellbeing & safety may have an effect on the company’s operations.
Profit fluctuates as the currency values differ from country to country.
After analyzing the financial statements of BG Group we emphasize that the company has a strong position in oil and gas industry as can be seen from its superior performance over its peer competitors. The company has buildup strong reserves and resources through its LNG business by continuous involvement in mergers and acquisition of business entities in some of the world’s major markets including USA, Brazil, India, Australia etc. In spite of increasing international commodity prices of oil and gas the company has achieved growth in all the business sectors over the last five years.
By analyzing different ratios and common-size statements, it can be said that mostly ratios are strong & encouraging in comparison with its competitors. However company’s performance as compare to last year is not satisfactory. Profitability of BG Group remained lower. The net profit margin declined by 29.37% in 2009 due to global economic downturn which reduced the demand for energy. ROE, ROA and ROCE were all lower compare to 2008. This directly affected the liquidity position of the company in 2009. Most of the ratios are better than industry average and competitors. Efficiency ratios are quite better implying the company has adopted better inventory management practices. The company’s long-term solvency position was also satisfactory which means company financed its assets mostly by its own capital rather than debt. The EPS and price to earnings ratios are much better than the peer competitors in the same industry. Again the performance compared to year 2008 was unsatisfactory where EPS reduced from 93.4 pence in 2008 to 64.5 pence in 2009 mainly because of the effects of the global economic downturn on world’s major economies which affected the company’s earnings. However, from the shareholder’s point of view, BG’s stock beta is 0.368 which implies less risk on investing in its stock.
Moreover, the results of third quarter of year 2010 states a better position in all respects due to improvements in the market economy. The fair result will only be concluded once the final results of 2010 will be analyzed in comparison to those of year 2009. The consensus recommendation of BG’s share is ‘outperform’ which suggests higher earning prospect in the years to come.
Thus, after all the facts and evidences based on the comprehensive financial analysis presented in this report it is our strong recommendation for investors to buy BG shares because of the stable outlook anticipates increased on-going growth, diversity, low production costs and high reserves of products.
Table 14: Concensus recommendation of BG’s stock
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