CORRECTED-Booming BG faces life without the Chapman factor
(Corrects paragraph three. BG is seen as rival to Exxon and Shell, not a partner in major projects)
* BG has high share valuation, strong output growth profile
* Highly dependent on Brazilian, Australian projects
* Long-serving CEO Frank Chapman to retire next year
By Andrew Callus and Sinead Cruise
LONDON, Sept 21 (Reuters) - - Under outgoing Chief Executive Frank Chapman, BG Group Plc has gone from small, state-run North Sea producer to outperforming top-20 global oil and gas player. His successor may need to bottle the Chapman factor to keep that up.
In 1997 when Chapman joined, BG was still shedding its gas utility roots and looked a likely takeover target.
Now as his 12 year tenure as CEO runs into its final months, BG is seen as a rival to heavyweights like ExxonMobil and Royal Dutch/Shell and the company is set to leapfrog BP and Total by 2017 to become the industry number four in liquefied natural gas (LNG) production.
Measured against the book value of assets, BG's shares are the highest valued in the Dow Jones Oil & Gas Titans 30 index apart from industry leader ExxonMobil and the super-profit makers of the oil services sector, Schlumberger and Halliburton.
They also trade at 13.3 times forecast earnings, ahead of multiples that range between 7 and 11 among its larger integrated peer group Exxon, Shell, BP, Total and Chevron . They have enjoyed that premium through most of the past 10 years, and total shareholder returns over that period are way ahead of the pack at 455 percent.
So there is a lot riding on Chapman's record, his strategy of organic growth, and the drilling successes that offer a rare prospect in the industry - a 6 to 8 percent output growth target set in the mid-2000s and still intact for the years stretching out to 2020.
Thomson Reuters Starmine data shows that 26 out of 32 analysts rate the stock the equivalent of "buy" or "strong buy", with only one on the equivalent of a "sell". But analysts recognise the scale of the challenge the company faces and sense some concern about Chapman's departure next year.
"This unease has been precipitated by the negative headlines coming from Brazil and Australia as well as growing concern over Sir Frank Chapman's succession," said Barclays analyst Lydia Rainforth in a research note reiterating an "overweight" rating on BG.
BG works in 25 countries, but Rainforth's comment about Brazil and Australia sweeps across two out of three crucial locations for its future. Without these two drivers and the United States, according to its own calculations, BG's net production from proved reserves will fall 3.9 percent by 2020. With them, it should more than double - hence the share price that points to climbing returns over the coming years while investors in the big names in the sector face shrinkage.
"Both projects are so big, they create inevitable tensions in company of BG's size," said James Laing, deputy head of European and UK equities at Aberdeen Asset Management which holds about 0.4 percent of BG stock.
"At the moment, you have to remember they have a significant amount of deployed capital which isn't really generating much in the way of returns. They are spending huge amounts of money, but it is not yet throwing off cash like the North Sea is for them, or like Thailand, or like Tunisia or Egypt. That is something that an investor needs to take into account."
Brazil is the driver of BG's future oil and gas production, the division that delivered about five eighths of BG's $8.2 billion of operating profit last year. BG hopes to ramp up its output worldwide to 1.0 million barrels of oil equivalent (boe) a day by 2015 from 720,000 this year, and to between 1.4 and 1.6 million by 2020. Brazilian output, likely to be very small this year, accounts for over one third of that 2020 projection.
The Brazilian government stopped awarding foreign licences in 2008 after the discovery of the Santos Basin offshore subsalts near Rio de Janeiro, and although BG got in before the doors shut and the government has promised an auction next year, the moratorium has curtailed activity there, and there are worries the state may take further steps to grab back the potential profits.
High-cost Australia accounts for the next biggest chunk of that output growth. A single vast project there is also central to BG's future in LNG, which along with a small contribution from gas pipeline assets delivers the remaining three eighths of the company's operating profit.
BG's coastal Queensland Curtis Island LNG (QCLNG) project will be the world's first coal seam gas to LNG production unit, fed by fields inland via 540 kilometres of pipelines.
All the capacity is contracted and the project is on schedule to produce in 2014, but BG acknowledged this year that it would have to find $20.4 billion to finance it, up from $15 billion previously and equivalent to about two years worth of its total capital spending. The overrun is a result of soaring costs and the strong Australian dollar.
"A lot of analysts focus on the worries about Brazil but I was always more concerned about Australia," said Aberdeen's Laing. "No one else has ever delivered such a large coal seam gas project into an LNG plant. There are some technical challenges around marrying the two up ... sometimes it is the last 20 percent of a project that is the hardest bit."
Chapman, a former Shell engineer who joined BG in 1997 and became CEO in 2000, is set to step down next year as he reaches the age of 60, and the company put a succession plan in place in November last year.
Chris Finlayson, managing director for Europe and central Asia, Chief Financial Officer Fabio Barbosa, and Martin Houston, managing director for the Americas and head of BG's LNG unit, were all given additional duties to test their suitability. At the same time, Andrew Gould, incoming BG chairman and former chairman of Schlumberger, was tasked with looking outside the company for talent.
The urbane and physically imposing Barbosa was previously chief financial officer of Brazilian mining giant Vale. He took on the BG CFO job last year, and as a former Brazilian finance ministry official, his value to the company's hefty exposure to the country is beyond doubt. However, investors see the odds stacked against the 51-year old given the predominantly anglophile, engineering culture of the BG boardroom. Barbosa was earlier this month granted leave of absence from his job, and is undergoing treatment in Brazil for an undisclosed medical condition.
Finlayson, another big man seen as having a good grasp of the business side of the oil industry, is, like Chapman, a Shell veteran. Industry insiders see the bearded 56-year old as having the right background for the dealmaking that is so important to BG's culture. Like Barbosa though, he is a relative newcomer, having joined the company in 2010.
Houston, 51, is a BG "lifer", having joined more or less straight out of college in 1983. An engineer by background but a strong communicator who is well liked by investors, he is neither big nor bearded, but some inside and outside the company see him as the leading internal candidate.
"The general path to CEO in oil companies has been an upstream guy, somebody who's been on the ground and worked the assets. That's the more typical path to chief executive within major oil companies," said Bernstein analyst Oswald Clint.
Investors and analysts see the internal field is an unusually strong one, but some expect an outsider, and they fear any replacement might be tempted to rein in targets on arrival.
"My biggest worry about a handover is that new management, whoever they may be, might be tempted to downgrade earnings expectations," said Laing.
"BG have done a tremendous job in delivering and a new starter might not think he can match that or feel comfortable about meeting those old targets. You always want to outperform, don't you?"
Keeping BG at the top of its game will be no job for the fainthearted. Starmine data shows that at Thursday's closing share price of 12.60 pounds, investors are pricing in a compound annual earnings per share growth rate over the next 5 years of 5.6 percent, wh il e rivals are in negative territory. (Additional reporting by Sarah Young, Scott Barber and Simon Jessop; Editing by Mark Potter)
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