BG Sees Production Falling as Egyptian Gas Curbs Cut Profit

Jan 27, 2014 12:37 pm ET

(Updates with closing share price in fifth paragraph.)

Jan. 27 (Bloomberg) -- BG Group Plc, the second U.K. oil and gas producer to issue a profit warning this month, said output will drop this year as political turmoil cuts exports from Egypt and other projects are delayed. The shares plunged.

BG expects 2014 production to drop to 590,000 to 630,000 barrels of oil equivalent a day from 633,000 barrels a day last year. Earnings for 2013 probably declined 33 percent to $2.2 billion, or about 65 cents a share, BG said today in a statement before releasing its results on Feb. 4.

Today’s announcement shows the difficulties faced by Chief Executive Officer Chris Finlayson, who took the helm a year ago, to restore value after earlier output-target cuts in 2012 weighed on the shares. Royal Dutch Shell Plc, Europe’s biggest oil company, also said this month that fourth-quarter earnings would fall to the lowest since 2009 amid slumping production.

“There is a lack of confidence in 2014 and 2015,” Jason Kenney, an analyst at Banco Santander SA in Edinburgh, said today by telephone. Lower gas volumes in Egypt and the U.S., combined with rising costs, will curb earnings at BG by about 15 percent in the next two years, he said.

The shares fell 14 percent to close at 1,082 pence. That’s the biggest one-day decline since the stock began trading in London in 1988, and wiped about $10 billion off the company’s market value.

2015 Forecast

BG also lowered its 2015 output forecast to 710,000 barrels to 750,000 barrels of oil equivalent a day, from the 775,000- barrel to 825,000-barrel-a-day projection it announced in May. The Reading, England-based company plans to write off $2.4 billion in assets in Egypt and the U.S. when it reports fourth- quarter earnings next week.

“Despite the good progress we have made in 2013, we face short-term issues which are reflected in our revised 2014 guidance,” Finlayson said in the statement. “This is very disappointing.”

The company is contending with delays ramping up projects in Brazil and the North Sea to full production, and has cut extraction in the U.S. because of lower gas prices.

Political unrest has affected output in Egypt, which accounts for about 18 percent of BG’s production, as gas is diverted away from export terminals to the domestic market. BG said today it will declare force majeure, meaning it won’t deliver on contracts to provide liquefied natural gas.

LNG Outlook

The company expects to generate $2.1 billion to $2.4 billion in profit from LNG operations this year, it said today. That’s below the $2.6 billion estimated by RBC Capital Markets in London.

BG expects costs to rise as it expands projects off Brazil and prepares to start LNG production at its Queensland plant in Australia in the fourth quarter of this year.

The company is “guiding for a sharp increase in unit operating expenditure” by as much as 34 percent to $16.25 a barrel this year, Bertrand Hodee, an analyst at Raymond James in Paris, said in an e-mailed report. That’s “probably the most negative point in today’s announcement.”

--Editors: Will Kennedy, Amanda Jordan