BG.

Citigroup’s Thomas finds reasons to be cheerful for energy group

by Tom Sieber

Recent weakness and the collapse of a bid for Origin Energy prompted David Thomas of Citigroup to upgrade BG Group (BG.) from ‘hold’ to ‘buy’.

The call, which Thomas made ‘for relative as much as for absolute reasons’, looked to be paying off impressively with the stock running up more than 10% until the market turmoil on Monday (15 September) trimmed those gains, now standing at around 4.6%.

Increasing his price target from £13 to £14, Thomas highlighted seven reasons why BG, which announced another discovery in Brazil last week, is worth investing in, even though it remains at a premium to the rest of the sector: the level of growth on offer compared with its peers; newsflow from Brazil; robust profits from liquefied natural gas (LNG); a defensive position in the face of lower US gas prices; exploration success outside Brazil; M&A potential and finally the ending of the group’s interest in Origin which had weighed on sentiment.

The market had been afraid that BG would overpay for the Australian coal bed methane specialist as it seeks to add to its capacity to provide LNG to energy hungry markets in Asia.

Thomas concludes: ‘While valuation alone is not a catalyst, a 30% expected total return to our 12-month target price plus M&A support to the downside means we see now as a good time to buy one of the few companies in a lacklustre sector to offer credible growth, catalysts, and a differentiated story.’