UK Royalty Tax Eats Into BG Q2 Profits

The new oil and gas royalty tax being imposed by the British Government will take a chunk out of BG Group's second quarter profits. BG is scheduled to report profits late next week. The company said in May that it would take a one-off 50 million pound ($78 million) charge for the impact of a new 10 percent tax slapped on North Sea production by the British government in April.

On Thursday a spokesman confirmed that BG will take the charge in the second quarter. Analysts say the new tax will also increase the company's overall tax rate to about 43 percent from 34.5, and at current oil and gas prices will slice about 10 percent off annual profits for the next few years. About half of BG's company-wide output is from the North Sea. This proportion will fall rapidly in future years because most of its strong output growth -- forecast at 22 percent this quarter from a year ago -- is taking place outside Britain.

Nevertheless for the time being the charge and actual tax effect will slash analysts' forecasts for net second quarter profits by more than half -- bringing the average net profit expectation down from 121 million pounds to about 54 million.

Analysts predict total operating profit of 205-229 million pounds against 215 million a year ago, with a consensus figure of 213 million, while at pretax level they expect 180-203 million with consensus at 189 million against 190 million last year.

Stripping out the 50 million pound charge to allow a better comparison with rivals BP and Shell which have treated the tax change differently), HSBC analyst Jon Wright expects BG to deliver 103 million pounds of net profit, which is down eight percent from a year ago. He said lower gas prices on the spot market will have had a negative impact, with realized gas prices set to fall about 14 percent.

Another cloud on the horizon is BG's 45 percent owned Argentine gas distribution subsidiary Metrogas -- a business that is in default on its dollar-denominated debts because of the collapse of the peso. "The business is in a mess and is unlikely to pay its way for years to come," said analyst Peter Hitchens at Cheuvreux. Comgas, BG's Brazilian gas distribution subsidiary, is facing less drastic currency and debt problems too.

Analysts said BG is likely to add a further negative currency adjustment to shareholders' funds on top of the 233 million pound adjustment made earlier this year for the two businesses. Metrogas contributed just three percent of BG's 2001 earnings and its debtors have no recourse to BG itself.

BG's predicted output growth of 22 percent will far outstrip its peers who are all likely to report this key measure in single figures. The acquisition of Enron's Indian assets and organic growth will contribute along with organic growth from existing fields.

Analysts expect first half dividend growth of about four percent to 1.56 pence a share.


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