Original Source: FD (FAIR DISCLOSURE) WIRE
. Robert Wilson, BG Group, Chairman . Frank Chapman, BG Group, Chief Executive . Ashley Almanza, BG Group, CFO . Ian Reid, UBS, Analyst
. Irene Himona, BNP, Analyst . Neil Perry, Morgan Stanley, Analyst
. Gordon Gray, JP Morgan, Analyst . Edward Westlake, Credit Suisse, Analyst . Colin Smith, Dresdner Kleinwort, Analyst . Mark Iannotti, Merrill Lynch, Analyst . Dave Thomas, Citigroup, Analyst . Matt Lanstone, Goldman Sachs, Analyst . Mobasha McAdam, Deutsche Bank, Analyst . Chris Revelend, EcoFin, Analyst
BRG reported 2006 EPS has risen by 24%.
A. Key Data From Call 1. 2006 share buyback = GBP750m
S1. Opening Comments (R.W.) 1. 2006 Highlights: 1. Operating results were good. 2. Plans for considerable further development of Karachaganak. 3. In Brazil, BRG had an exploration success, fairly late last year. 1. Upside potential of this could be big. 2. Has positive implications for other exploration assets in the Santos Basin. 4. BRG has another potentially large opportunity in Nigeria. 5. In Norway, Co. has now more than 20 exploration licenses and is now only beginning to start drilling.
S2. Business Review (F.C.) 1. 2006 Highlights: 1. EPS has risen by 24%. 2. Production is up by 19%. 3. LNG liquefaction volume is up by 63%. 4. Near doubling in operating profits from the LNG business. 5. After Co.'s decision last year to significantly increase
dividend, BRG announced on 02/08/07 a further increase of 20%.
6. Following up last year's share buyback with a further GBP750m
of buyback. 2. Outlook: 1. Reconfirmation of the earnings outlook to 2009. 2. Distinctive long-life base set of assets has been further improved. 3. Significantly enhanced set of projects to 2012 and beyond. 4. Exploration and production resources are up by around 1b barrels oil equivalent. 5. Since started transformation of the business in 1996, has forged a powerful strategy and a powerful investment proposition. 1. Turned around exploration performance. 2. Has transformed cost base.
3. Has grown volumes strongly. 6. Aforementioned progress has found expression in profitability, 39% per annum CAGR in operating profit over the full ten years.
S3. Strategic Review (F.C.) 1. Strategy: 1. Strategy remains unchanged because it continues to deliver value. 2. Strategy is based on a simple concept identifying and focusing on specific selected high-value markets and securing low-cost gas to connect to those markets. 3. Implements the strategy by investing selectively across each of the segments in exploration and production:
1. LNG. 2. Transmission. 3. Distribution. 4. Power. 4. Continues to enjoy benefits of high oil and gas prices.
1. High oil and gas prices have driven significant cost increases and increased project cycle times. 2. Believes that low-cost portfolio, continued top quartile performance on unit costs and project delivery focus gives BRG competitive advantage. 3. This advantage would be particularly marked, should oil prices fall back below the levels experienced recently. 5. Governments in resource-rich countries are changing their perspectives on how to develop their resources in the light of the higher value of hydrocarbon and are taking greater direct control. 1. This is adding to the challenges already faced by the industry in accessing these new opportunities.
2. Strategy is proving robust in the face of this trend because
of BRG's expertise in gas and willingness to work alongside partner governments to support their broader economic goals. 6. At a time when the strategic importance of resource renewal has moved up the agenda, BRG has been able to make important additions to its exploration and production portfolio. 1. Examples are Algeria, Brazil, China, Nigeria, and Norway, and Oman. 7. Demonstrated a track record of responding swiftly to market trends, often ahead of the competition. 1. It is BRG's integrated approach to the gas value chain and the focus on building access to and supplying specific markets that gives BRG this edge. 2. Financials (10-Years Outstanding Growth): 1. Volumes in exploration and production have grown at some 15% per annum CAGR. 2. In LNG, has grown to establish the leading Atlantic Basin position over this same period. 3. This has translated into a 39% compound growth rate in operating profits over the ten years.
S4. Operational Review (A.A.) 1. E&P: 1. Recorded 19% increase in production for the year. 1. Operating profit rose by 27%.
2. Higher commodity prices and significant step-up in production
more than offset the expected increase in exploration charge.
3. Although 4Q06 avg. production was 622,000 barrels per day, Co.
ended the year 2% below production target. 1. This was due to an undersea line in Egypt being ruptured by a ship's anchor together with delays in the start-up and ramp up of new assets.
2. There was no impact on medium and long-term production growth.
4. Unit Opex was $4.82 per barrel for 4Q06. 1. This took BRG to $4.18 for 2006, in line with previous guidance. 5. Exploration expense increased by 50% to GBP272m. 1. This was mainly as a result of substantially bigger work program, but reflects industry-wide inflation. 2. Review of Proved Reserve Changes: 1. Had promotion of 2P reserves. 2. Reserves booked from new developments and new sales on existing assets. 1. Together, these two categories make up the underlying performance, which replaced 110% of 2006 production.
3. Year-end prices had an impact on reserve replacement rate.
1. This was mainly due to higher net-back prices on Karachaganak sales through the CPC line. 2. Elsewhere lower prices reduced reserve replacement rates through tax and royalty concessions and fiscal entitlement in other licenses. 4. In aggregate, SEC additions to proved reserves was 184m barrels, a replacement rate of 84%.
5. Three-year reserve replacement rate was 108%. 1. Since BRG increased its total resource base by approx. 1b barrels during 2006, the prospect of the successful development of these resources gives BRG growing confidence that it will continue to be very competitive on reserve replacement rate. 6. Across the industry, costs have continued to rise quickly. 3. E&P Outlook: 1. Planned production growth over 2006-2009 remains between 5-7%. 2. Expects volumes to build progressively during 2007 as new fields ramp up through the year. 3. Expect unit Opex of approx. $4.60 per barrel in 2007.
1. Increase reflects the lagged effect of higher commodity prices and changes in the production mix. 4. 2007 budget for exploration and appraisal is approx. GBP600m, with a P&L charge of around GBP320m. 4. LNG: 1. In shipping and marketing, volumes rose by 29% in 4Q06 and operating profit rose to GBP118m. 1. Increase reflects growing capability to deliver LNG to the best markets around the world. 2. 4Q06 profit included GBP20m of GBP30m gain, which Co. locked in during 2Q05. 1. Because of the way forward prices moved, Co. is required under IFRS to recognize a portion of that gain in 2006. 2. For the full year, volumes increased by 55%.
1. Operating profit in shipping and marketing rose by 177% to
GBP332m. 3. Profits from liquefaction fell slightly in 2006, as rent was transferred upstream from Egyptian LNG and as Co. incurred start-up costs from Train 4. 1. Start-up of Train 4 was slower than anticipated and as result total liquefaction volumes of 6.7m tons was slightly below full-year target. 4. As expected, business development and other costs rose to GBP84m for the full year, as Co. continued to develop new supply and new market opportunities including the OK LNG project in Nigeria and Chile LNG. 1. As before, Co. expenses all these costs as it goes.
5. For the LNG segment as a whole, operating profits rose by 94%
to GBP352m in 2006. 5. LNG Outlook: 1. For liquefaction, expects an annual pretax return on capital of 13% for the period 2007-2009. 2. Invested capital is expected to be approx. GBP100m lower than previously indicated. 3. In shipping and marketing, Co. continues to see a global shortage of LNG persisting for at least five years. 1. This together with global marketing capability and flexible low-cost portfolio provides Co. with confidence in its
ability to sustain strong margins in this business. 4. BRG is already locking in some of these high margins out to 2009 and beyond. 1. As a result, Co. expects its EBITDA margin to be around 16% in 2007, rising to 18% in 2009. 2. This assumes that around 30% of LNG is marketed outside the US, which is lower than 2006.
3. Has assumed Henry Hub reference price of $6 per mbtu. 5. Although BRG will continue to pursue spot volumes in this tight market, has discounted any contribution from spot supply
in revised guidance and is based on 13.5m tons in 2009. 6. Net results of all of these changes is a healthy increase in the expected contribution from LNG business. 6. Transmission & Distribution:
1. Total operating profit was GBP231m, a full year increase of
25% after adjusting for the effects of the natural gas
deconsolidation. 2. Comgas delivered a 10% increase in volumes and reported 27% increase in sterling operating profits as the Brazilian currency strengthened in 2006. 3. For 2007, BRG expects volume growth of 7-8% at Comgas. 7. Power: 1. Operating profit decreased by GBP7m, mainly due to increased maintenance activity at Premier Power in Northern Ireland. 2. With the pending completion of Lake Road acquisition, BRG will have two new power assets in North America this year. 1. These assets should contribute around GBP18m to group operating profit in 2007. 2. Expects the contribution to rise progressively for the following three years, as Co. integrates these assets into US gas business. 8. 2006 Consolidated Results: 1. Total operating profit increased by 30% to GBP3.1b.
2. Full-year finance costs of GBP43m reflected lower net debt and
receipt of GBP28m interest in relation to tax settlements.
3. In forecasting 2007 interest charge, one will need to factor
in the one-off effect of the tax settlements and …