BG Group BG. reported largely uneventful first-quarter results with most key metrics in line with previous guidance, which provided a welcome respite from previous quarters’ downward production guidance revisions and budget overruns. Total operating profit fell to $2.1 billion from $2.3 billion the year before as lower production and higher operating costs and depreciation offset the benefit of higher realized gas prices. Production fell to 659 mboe/d from 669 mboe/d a year ago, but was in line with full-year guidance of 630-660 mboe/d, which remains intact. More important, BG continued to hit its marks with respect to previously established milestones for the quarter, including bringing FPSO 2 in Brazil on stream and restarting production from the Elgin/Franklin field. The firm continues to hit high notes in Brazil with gross production from the two operating FPSOs reaching 140 mboe/d. BG is finally on the cusp of delivering the long anticipated, significant production growth from Brazil. So while production is expected to be flat this year, we think the upcoming growth spurt will bring attention back to BG’s long-term prospects and close the gap between the share price and our fair value estimate. FPSO 3 is set for a second quarter startup and along with FPSO 2 will ramp up production later this year. Meanwhile, FPSO 4 and 5 are 60% complete and slated for production startup in 2014.

The increased production from Brazil led to higher operating costs of $11.08/boe, within previous guidance, compared with $9.54 last year due to increased royalties. However, lifting cost increased only slightly to $6.31/boe from $6.22/ boe a year ago. Depreciation also ticked up to $11.08/boe from $8.53/boe a year ago because of new project startups. LNG operating profit rose slightly to $742 million from $720 million a year before. Results were in line with full-year guidance of $2.5 billion-$2.7 billion, which is unchanged. While BG is less hedged than years’ past, it is also realizing lower prices on cargoes to Chile. The quarter lacked any meaningful news, but BG is holding a strategy update on May 14, when it plans to offer a more detailed update on its year-to-date progress and future growth plans. We are maintaining our fair value estimate and moat rating.