May 14, 2013 / 7:06 AM / 5 years ago

UPDATE 2-BG tightens focus on exploration, LNG, dealmaking

* Focus on value not volume after missing output targets

* Shares up over 3 pct, lead European oil and gas stocks higher (Writes through with details, CEO comments)

By Andrew Callus

LONDON, May 14 (Reuters) - Oil and gas group BG will focus on exploration, liquefied natural gas (LNG) and selling or partnering more of its discoveries as part of a new emphasis on profitability after being forced to cut ambitious output targets.

The gas-focused British company, whose main growth assets are in Australia and Brazil, said the proportion of its production with a profit margin of more than $50 per barrel of oil equivalent (boe) would triple over the next five years, and that its heavy capital spending budget would peak in 2015, allowing it to return surplus cash to shareholders from then.

In a keenly-awaited strategy statement under new management and after a crisis of investor confidence in the final quarter of 2012, the company said it would “manage its portfolio more actively” in future, partly through asset sales, and partly by bringing in partners to ramp up output more quickly.

The aim is for 50 percent of its discovered resources to be either sold or produced in the next 10 years.

BG shares were the top gainers among European oil and gas stocks on Tuesday, climbing 3.2 percent to 1,223 pence.

Last year, the energy investors’ one-time darling shocked shareholders by saying it would miss output targets. Then, in February, it had to abandon its goal of producing 1 million barrels of oil equivalent a day by 2015, blaming failed well rejuvenation efforts in Egypt and a fall in U.S. gas prices to uneconomic levels.

The news came at a tricky time at the top of the company as long-serving former chief executive Frank Chapman retired several months early due to illness.

On Tuesday, new chief executive Chris Finlayson, who took over at the start of 2013, set himself a more modest 2015 output target of between 775,000 and 825,000 boe per day by 2015, up from 667,000 now. He said there would be no output targets more than two years ahead in future as the company focuses on value over volume.

Oil and gas companies have a history of switching their performance measures after failing to meet existing ones, creating a degree of cynicism among investors. Earlier this year, BP also made a virtue of circumstances that have forced it to rein in its growth prospects. Other oil companies are also moving away from volume measures as meeting them gets difficult.

“We’re acutely aware of that, and I know that’s a view that can be taken,” Finlayson told Reuters ahead of his presentation to shareholders and investors on Tuesday. “That’s why we have been careful to show in this presentation exactly how we will deliver that value.”

Despite its recent problems and a slump in its share price in the final quarter of last year, BG’s shares still trade at a premium to their peers as a multiple of current year earnings.

Analysts put this down to its strong track record on finding new supplies, its exposure to tight LNG markets, and its position in Brazil’s potentially prolific Santos basin, where it and a handful of other companies were able to secure acreage before the government decided to limit future development to the state oil firm Petrobras.

Petrobras on Tuesday launched Brazil’s biggest ever bond sale raising $11 billion of new debt to help fund its huge $237 billion investment programme for the period up to 2017

BRAZIL RISK

BG has been a widely diversified company in the past but now has a very heavy exposure to Brazil, which it hopes will account for over 600,000 boe a day at its peak - not far short of its entire current output.

However, it has no plans to include its exposure there in any asset sales over the next few years, Finlayson said.

“All our assets will be under permanent review, (but) for at least the next few years, we see ourselves creating far more value in Brazil through ongoing exploration and production activities than we see from any form of monetization. If you’re going to have risk concentration, I’d rather have it in the best discovery in decades, where we have the biggest IOC (International Oil Company) position.”

By 2015, as BG’s costly QCLNG gas-for-export development in Australia reaches completion, capital spending will fall from $12 billion a year currently to $8-$10 billion, allowing free cash flow to turn positive, increasing return on capital employed, and allowing improved shareholder returns.

“We’ll be big enough to pursue the best opportunities but small enough to stay commercially agile,” Finlayson said. (Editing by Sarah Young and Mark Potter)

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