BG is best known to small investors for its regulated Transco gas pipeline business, and it is easily forgotten that it has a major oil and gas exploration and production (E&P) business which is nearly as big as Lasmo and Enterprise

combined.

E&P profits jumped in the first quarter although they were still only 13% of Transco's.

The business is likely to account for much of the growth in profits in coming years. Transco has benefits to come from further cost-cutting.

It is constrained by the regulator but the only constraint on E&P is competition and oil and gas prices. The latter is a clear factor at present, though the price of gas, which accounts for most of BG's exposure, has not been as weak as that of crude.

E&P reserves doubled in 1997 but some of those reserves are in troubled areas of the world such as Indonesia. It has the possibility of a major find in the

Caspian Sea to come this year.

The biggest single investment overseas is in Kazakhstan, which is moving towards production once a 1600-kilometre pipeline to the Black Sea is completed in late 2000. BG has a major

exploration target in Egypt.

Main production comes from the North Sea and the Government intends increasing the tax take, which is one uncertainty hanging over E&P.

However, the Government is likely to draw on past experience and not increase taxes to the point where it depresses activity.

In common with Centrica, the marketing arm of the former British Gas, BG shares have performed well but the rating still appears to undervalue E&P's assets compared with other E&P companies.

Arguably they should be rated more highly given that they are supported by the steady earnings and strong cash flow of Transco. At the least the shares are well supported and have potential, so shareholders should sit tight.