Investors have reacted aggressively as BG (BG.) downgrades production guidance on 2014 and 2015 blaming problems in Egypt. The FTSE 100 constituent is down 14.9% to £10.68.
BG expects to produce between 590,000 and 630,000 of barrels of oil equivalent per day (boepd) this year, 12% below analysts expectations and 7% below its 2013 production.
The group also cut its 2015 guidance to between 710,000 and 750,000 boepd, from last May's target of 775,000-825,000 boepd. For 2013, BG said earnings would fall 33% to around $2.2 billion due to a $2.4 billion write off to reflect difficulties in Egypt, as well as lower future gas prices in the United States. Its 2013 results are scheduled for release early next month (4 Feb).
The Egyptian government has not been honouring agreements covering BG's share of gas with high levels of gas being diverted to the domestic market. This prevents the company from meeting obligations for an Egyptian liquefied natural gas (LNG) project and it has responded by serving 'force majeure' notices to affected buyers and lenders. This frees all parties from their respective contract terms due to circumstances beyond their control.
The issues in Egypt had previously been identified and the country accounts for around a fifth of the £36.4 billion cap's output but we – like the market – have been caught out by the scale of the impact. Santander analyst Jason Kenney says earnings forecasts for 2015 could be cut by up to 15%.
Deutsche Bank, which maintains its 'buy' rating and £14 target price for now, comments: 'The bottom line is that this is the fourth production downgrade in 18 months and the second material downgrade under the new CEO. This will likely be taken very negatively by the market today.'
RBC Capital Markets, which has a 'sector perform' rating and £14 target price, sees one chink of light in today's statement: 'On a more positive note, BG still expects to be free cash flow positive in 2015, in line with our current estimates.'