By Dinakar Sethuraman and Ben Farey
Jan. 19 (Bloomberg) -- BG Group Plc, the liquefied natural gas market’s seller of last resort and the biggest winner when long-term contracts couldn’t meet demand last year, is poised for a fall.
The LNG market is growing at its slowest pace in 28 years as the global economy slows. Forward contracts show prices may slump about 70 percent, and rivals plan to increase supplies by 33 percent, according to Citigroup Inc.
“Spot LNG prices and sales will suffer,” Kenan Najafov, a London-based analyst at BNP Paribas SA, said in a phone interview. “BG maximized exposure to spot LNG prices, contrary to companies like Royal Dutch Shell Plc, BP Plc and Total SA who favor long- term contracts with lower risk and lower value.” Najafov, who is second on the Bloomberg Absolute Return Rank for his recommendations, rates BG as “underperform.”
Earnings at BG, which 19 of 25 analysts rate a buy, may decline 27 percent to $2.1 billion pounds ($3.1 billion) in 2009, assuming crude oil at $60 a barrel and U.S. natural gas at $6 per million British thermal units, said Jason Kenney, an analyst with ING Wholesale Banking, which rates BG as hold. Crude has tumbled more than 70 percent to $36.35 a barrel from a July record and U.S. gas have plunged 66 percent to $4.72 per million Btu.
Recessions in the U.S., U.K. and Japan and more than $1 trillion in writedowns and credit losses since the start of last year may send crude oil as low as $30 a barrel in the first quarter, Goldman Sachs Group Inc. said. U.S. gas prices are estimated at $5.35 per million Btu in summer 2009, down 61 percent from July 2008, the bank said.
Buyers to Gain
BG, the biggest supplier of spot LNG cargoes to Asia, stands to lose profits as Korea Gas Corp. and Tokyo Electric Power Co., the world’s biggest buyers of the fuel, gain because of lower costs.
UBS AG downgraded BG to “neutral” from “buy” because of concerns on the “short-term state of the global natural gas market,” according to a note on Jan. 14.
The utilities may save more than $5 billion a year for every $1 per million Btu drop in LNG prices, according to data compiled by Bloomberg based on annual purchases in BP’s Statistical Review of World Energy 2008. LNG, which is natural gas chilled into liquid so it can be transported by ships, generates about 24 percent of Japan’s power and burns cleaner than coal or fuel oil.
Spot supplies, sought by buyers to meet seasonal or emergency needs, aren’t part of multiyear agreements.
‘Huge Profits’ Gone
“Huge profits from diverting LNG cargoes to Asia are no longer there and the buyer’s appetite for LNG imports in Asia has been tempered by slower demand growth and worries about future economic growth,” said Fereidun Fesharaki, the head of Honolulu, Hawaii-based consultant Facts Global Energy.
Forward prices of gas in the U.K. and U.S. indicate LNG cargoes will be sold into Asia, the U.S. and U.K. markets in a range of $5 to $7 per million Btu from $18 per million Btu paid by Japanese utilities in October, said Andy Flower, an LNG consultant and former executive at BP’s LNG business.
Imports from the Atlantic Ocean area by Japan, South Korea, India and Taiwan may have dropped to at least seven cargoes compared with about 25 a year earlier, according to AISLive, which tracks radio transmissions from vessels. The global economic slowdown and a cooler summer reduced demand in Asia and increased inventories at utilities.
BG’s operating profits from LNG in the first nine months of 2008 rose more than threefold from a year earlier and accounted for about 27 percent of operating profits. By contrast, BP’s gas, power and renewable energy sources accounted for 2 percent of operating profits last year while Shell derived 9 percent of its net income from gas and power.
Shares Decline
BG shares fell 36 percent from a high of 1,415 pence in May to 905 pence on Jan. 15, snapping five years of gains. The 12- month target price for BG is 1,175 pence, according to the average of eight analysts’ estimates who updated their reports in the last two months, in a Bloomberg survey. There were two downgrades in that period. The shares have surged more than fourfold in the past five years as LNG prices gained on rising Asian demand.
BG expects its LNG operating profit for 2009 to be about 1.3 billion pounds, Jo Thethi, a spokesman for the Reading, England- based company, said in an e-mail on Dec. 4. The company estimated profits of 1.4 billion pounds from LNG in 2008.
“This guidance was based on having sold 50 percent of production forward at a fixed margin,” Thethi said, without providing the margin.
Forecast ‘Ambitious’
“Guidance given by BG that operating profit may be 7 percent lower is ambitious,” said BNP Paribas’s Najafov, who was ranked second among analysts who cover BG by Institutional Investor magazine.
LNG supplies are rising as new plants from Russia to Yemen may add 33 percent in additional supplies by the end of this year, Citigroup’s New-York based analyst Gil Yang said in a report on Dec. 8.
BG’s strategy “worked while demand was high and supply was limited,” Najafov said, who was ranked first among 25 analysts covering BG for his recommendations on companies he covered.
Shipments from the Atlantic Ocean area to Asia slowed to 2.5 million tons in the fourth quarter of 2008 from 4.1 million tons in the first quarter, said Flower, who has more than 20 years experience in the industry.
With slumping Asia demand, the excess LNG must go to the U.S. or U.K. at local prices, Citigroup said. U.S. gas futures for June are trading at $5.15 per million Btu, while U.K. gas is quoted at about $6.50 in the same period. That compares with $20 sellers such as BG secured from Asia last year.
In the first nine months of last year, Asian utilities tripled LNG purchases from the Atlantic, Flower said.
The closure of Tokyo Electric’s Kashiwazaki-Kariwa nuclear plant after an earthquake in July 2007 also pushed up the use of oil- and gas-fired generation units.
To contact the reporter of this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net; Ben Farey in London at bfarey@bloomberg.net
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