At a time of falling crude prices – down 15 per cent over the past fortnight – a highly rated oil and gas producer needs to do more than report in-line figures to prevent its shares from following suit.

Unfortunately for BG Group, whose stock fell more than 6 per cent yesterday, that was a feat it was unable to achieve. Second-quarter net adjusted operating income was up 92 per cent on the year to a record £1.43 billion, or nearly 2 per cent ahead of consensus forecasts. But that was not enough for a stock market that has become accustomed to BG beating its estimates by a greater margin.

That BG did not was down to disappointment in exploration and production, its biggest division, where volumes rose a less than expected 2 per cent to 601,000 barrels, or flat on the previous quarter. The causes appear temporary, however: shutdowns caused by the Ineos industrial dispute at its Grangemouth refinery, maintenance work at the Armada field in the North Sea and an explosion at BG’s Panna joint venture in India. All the same, this suggests that production growth this year is likely to be closer to 5 per cent than the 6 per cent previously expected.

More worrying is that BG has been selling its natural gas from the UK for less than expected: at an average 33p a therm, against some forecasts of more than 40p a therm. The culprit appears to be surging spot prices, which have induced BG’s customers to draw down lower-priced gas under long-term contracts rather than buying at spot.

But such short-term setbacks should not obscure the case that the long-term investment case for BG remains intact.

First, profits from liquefied natural gas (LNG), where it remains a world leader, continue to surge: up nearly fourfold, from £88 million to £367 million. The company’s shipping and marketing division was able to take advantage of regional differences in LNG prices to divert cargoes to where it could secure the best price – in this case, Asia.

Secondly, BG appears to have lost none of its knack with the drill bit. Over the past three months alone, it has made eight significant discoveries, spanning Algeria, Brazil, Norway, Thailand, Trinidad and the UK. The remainder of 2008 promises more of the same, with BG due to provide further exploration updates on Norway, Egypt, Oman and, most importantly, Brazil, given the massive potential of its offshore acreage.

Apart from oil prices, BG’s shares are likely to remain susceptible to the near-term production outlook – notably the development of the next phase of the Karachaganak field in Kazakhstan – and the progress of its hostile A$14 billion (£6.7 billion) bid for Australia’s Origin Energy. However, at ten times 2008 forecasts and earnings set to grow at double digits, BG is now in the territory where it could become a target itself. Buy at £10.68.

Capita Group

Capita Group – its shares down only 4 per cent since January – is the constituent of this year’s Tempus Ten giving least cause for concern, and there was little in yesterday’s first-half figures from the £4 billion outsourcing specialist to change that view. Revenues were up by 20 per cent – or 14 per cent once the effect of acquisitions is stripped out – earnings per share rose 19 per cent and the dividend is being raised 20 per cent. More importantly, given its bearing on future profits, Capita’s pipeline of prospective work has swelled from £2.5 billion to £3 billion over the past six months.

Custom from local government – the niche from which Capita grew – remains buoyant, with a less generous allocation of funds from central government making potential cost savings from outsourcing more attractive. Further, life insurers’ and pension providers’ moves to contract out the running of their back offices – Capita’s fastest-growing business – show no sign of abating, with first-half sales leaping from £106 million to £229 million.

Such expansion, and a pickup in the pace of bolt-on acquisitions, has held back operating margins, down from 13.1 per cent to 12.9 per cent. There is also the potential for a private sector slowdown to hurt Capita’s less defensive activities, such as share registration, unit trust administration and staffing.

At 20 times current-year earnings, Capita’s shares may find it hard to appeal to first-time buyers, given the premium to peers. However, long-term contracted revenues linked to inflation and annual forecast earnings growth of nearly 20 per cent over the next two years give ample reason to hold on at 670p.

BSS Group

BSS Group, the distributor of plumbing and heating supplies, may commonly be bracketed with builder’s merchants but as yesterday’s trading update indicates, the business of shifting taps and thermostatic valves appears far less cyclical than selling timber or cement.

BSS offered reassurance that it is on track to meet full-year profit forecasts and said that like-for-like sales continue to grow, at about 8 per cent in its industrial division in the first quarter and at 3 per cent in residential. That is a considerable achievement given the weakness of the housing market and bears out BSS’s stance that its low exposure to new-build homes – about 5 per cent of sales – a strong position in the public sector and resilience in repair and maintenance spending provide useful insulation. That Wolseley, whose Plumbcenter is BSS’s biggest rival, reported falls of 5 to 6 per cent in like-for-likes last week also suggests BSS is taking market share.

However, stock market sentiment remains firmly against BSS. At 277¼p, its shares have fallen 28 per cent since May, to less than eight times forward earnings. With little likely to change that mood, BSS is best avoided.

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