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BG sells Australian pipelines for £3bn but shares dip on weak oil price

Fresh from a shareholder revolt over its planned pay packet for new chief executive Helge Lund, oil and gas business BG has sold its Australian pipeline business for $5bn (£3bn). But the weak crude price has put renewed pressure on its shares despite analysts welcoming the deal.

This is the company’s biggest disposal this year and is part of its strategy to disposed of unwanted assets to reduce debt and return cash to shareholders. The sale of QCLNG Pipeline, to Australia’s APA Group is expected to be completed in the first half of next year, depending on the start of commerical LNG deliveries and consent from its partners.

BG will make an after tax profit of $2.7bn which will be used to reduce debt anf fund growth. It is expected to sell other operations in Brazil and East Africa, as Lund begins his tenure.

But after an early boost, its shares are down 0.8p at 898p. Richard Griffith at Canaccord Genuity said:

The sale reduces our forecast gearing level for BG in 2015 to 32% from 45% and below our 2014 forecast of 39%. This is a significant sale as it removes concerns in the medium term about BG’s balance sheet gearing moving too high and risking a credit rating downgrade. The deal, though, is unlikely to prevent BG from scaling back capex next year from the current guidance range of $8-10bn per annum. to as low as $6bn following the recent collapse in oil prices.

We keep our buy rating and leave our 1260p target price unchanged.

Deutsche Bank separately issued a buy note albeit reducing its target price from £13 to £11.75, saying:-

To say that BG has disappointed on perceived potential in recent years would be an understatement. Looking into 2015 we believe, however, that this is the year when at last the company should deliver. Very importantly, with 90,000 barrels a day of net growth capacity now in place in Brazil, first LNG likely produced by end year and first oil from Knarr in Norway also anticipated visibility on production growth should add considerable confidence on forward potential. No doubt earnings will prove volatile across the period. Underlying direction should, however, become increasingly transparent.

Several years into the capital build and 2015 will in our view be the year when things finally start to come together operationally for BG Group. Start-ups by end 2014 should underpin a year of strong production growth and add considerable visibility on future potential. At the same time, collapsing capex and strong underlying growth in OCF should dramatically lessen financial risk. This leverage together with BG’s merger appeal suggest to us a share price that ought be well underpinned at current levels with material upside gearing as investor conviction in delivery improves.

Overall markets are moving higher after the week’s sharp reversals. The FTSE 100 is currently up 18.04 points at 6547.51, with falling inflation in China raising the prospect of further rate cuts. But the shadow of Greece still hangs over the markets, with next week’s presidential vote raising concerns over a snap election which could be won by the far-left Syriza party.

Back in the UK, equipment hire company Ashtead has added 80p to £11.57 after it reported a 33% rise in half year profits and raised its guidance for the full year for the second time. Berenberg issued a buy note, saying:-

Ashtead delivered first half results ahead of our forecasts and has upgraded its guidance for the full year to “ahead of previous expectations” [and] we forecast consensus will increase by around 4.5%.

The results show that the company continues to benefit from the non-residential construction recovery in the US, take market share and improve its margin as it benefits from its scale and strong underlying rate growth in the market. On a December 2015 PE of 16.3 times for three years earnings growth of 24.8%, we believe the shares are attractive.

Airline shares were boosted by another fall in oil - with Brent crude currently down 1.23% to $66.03 a barrel. British Airways owner International Airlines Group is up 5p to 463p while easyJet is 27p better at £16.52.

Carnival has climbed 99p to £28.18 as Numis raised its target price from £25.50 to £29.50. Analyst Wyn Ellis said:-

Carnival (as implied by the recent share price performance) is a major beneficiary of the collapse in fuel prices. If current fuel prices are broadly maintained, we estimate a bunker fuel cost saving of over $500m in 2015 and we have increased our 2015 earnings per share forecast by 35% from $2.20 to $3.00.

Our confidence in the upgrade is reinforced by growing evidence that yields in the industry are on an upward curve. With the demand backdrop improving and the industry committed to growing return on invested capital we believe that there is every opportunity that the cruise companies will retain the fuel cost saving rather than see it being competed away.

Precious metal miners were still in demand as gold and silver held their recent gains, with Randgold Resources rising 83p to £44.18 and Fresnillo adding 23.5p to 756.5p.

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