Wonder of wonders, there exists an analyst's report that says in plain English, "We rate the shares a Sell." The report, written by the energy research team in Commerzbank Securities AG's London office, is not as negative as that rating would imply at first glance however. It refers to BG, the British company that has reserves of almost 1.5 billion barrels of oil equivalent, 73% gas. Indeed, formerly known as British Gas, BG was spun out in several restructuring and privatization moves in 1997 and 2000. With a market capitalization of $15.8 billion, BG remains one of the more successful energy companies around, outranking its peers and many of the majors on a number of criteria, even though it is smaller, according to Commerzbank. This makes the advice to sell the stock ironic-but not necessarily puzzling. The reason for Commerzbank's frank recommendation? "The shares are trading at a 19% premium to our target price of 260 pence...and at a premium to both BP and Shell. We believe its long-term growth prospects are already adequately reflected in this rating. To justify the current share price [310 pence] we would need to assume E&P production growth of 7% per annum...." Commerzbank instead foresees growth of 5% annually. BG's strategy is to focus on the gas value chain, from production to transmission to liquefied natural gas (LNG) plants and power plants. The analysts cite BG's superior long-term growth prospects and its strong balance sheet, with debt to peak at only 34% in 2003 based on increased capital spending. It has production or exploration interests in the U.K. North Sea, Kazakhstan's remarkable multibillion-barrel Karachaganak and Kashagan fields, Trinidad, three Latin American countries, Egypt, Italy and Asia. It recently acquired the Enron Oil & Gas India Ltd.'s E&P assets in India. The company also has a strong hand in the global LNG and power businesses. Last May it signed a 22-year contract with CMS Energy to supply LNG to the latter's receiving terminal in Lake Charles, La. Last July it ordered a new LNG tanker, to be delivered in 2004, that will transport LNG from its expanding Trinidad plant to the U.S. Commerzbank says it is concerned about BG because so many of its E&P assets are in countries with political risk-one-half of its valuation lies outside the countries that make up the OECD (Organization of Economic Cooperation & Development). Therefore, project-execution risk is high. That risk is also high for this company because its share price assumes above-average growth, which is almost always difficult to deliver. BG expects its production-average to be 15% per year between 1999 and 2003. Finally, the analysts say they see BG as a predator rather than a takeover candidate, as was its peer, Enterprise Oil. -Leslie Haines
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