Beach Energy Mulls Life Without Chevron

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

-Decision a catalyst for Beach?
-Highlights project uncertainty
-Potential for consolidation?
 

By Eva Brocklehurst

US oil major Chevron has decided to forgo its stake in Beach Energy's ((BPT)) unconventional gas project in the Cooper Basin, astride the South Australian and Queensland borders. The licences revert back to Beach and its junior partner in SW Queensland, Icon Energy ((ICN)). Brokers expect Beach will minimise expenditure while it seeks a new partner to fund exploration.

Chevron originally acquired a 30% stake in the permits in South Australia and an 18% interest in the SW Queensland permit via a stage 1 farm-in agreement in 2013. Chevron had the opportunity to double its interest if it triggered a US$125m stage 2 option.

Brokers were not surprised at Chevron's decision, given the company had stated it was fine tuning its focus in a weak oil price environment. Morgan Stanley observes shale and tight gas exploration in the Cooper has been slower than expected, with more time and capital required to determine commercial prospects. Chevron's decision, therefore, may be an important catalyst for Beach and the broker would welcome a decision by the company which downplays its focus on shale.

UBS also notes the Cooper program was plagued with completion and fracture stimulation issues and the results to date indicate there was a long way to go. UBS had expected Beach would look to renegotiate with Chevron rather than let it walk, although it remains unclear whether Beach did try. UBS estimates Beach has spent $445m in unconventional gas exploration to date and has booked 2,766PJ of 2C contingent resources. The broker carries zero valuation for the unconventional potential in its 95c price target.

Beach has high quality oil assets in the western flank of the Cooper Basin but these are producing at their peak rate, and recent drilling has not come close to replacing the produced reserves. UBS estimates the reserves/production ratio for western flank oil implies a reserves life of under three years.

The exit of Chevron is somewhat of a blow in JP Morgan's opinion, given the early redemption of Beach's $150m convertible note recently. The broker retains an Underweight recommendation, as without valuation credit for unconventional gas from the Cooper the company's oil and conventional assets are more than fully valued. JP Morgan is also not completely sure that Chevron's exit is unrelated to the commercial prospectivity of the assets rather than just a soft target for spending cuts.

JP Morgan suspects the long-dated and uncertain nature of these prospects did not comply with Chevron's focus on conserving capital for near-term commitments. The broker always found Chevron's involvement in this project a little confusing, given as a major oil producer, it has no direct path to the Gladstone export projects and another greenfield LNG project on the east coast of Australia is unlikely.

In terms of the positive implications for Beach, Chevron has carried a large amount of the science to date in the project and Beach, now it reverts to being a 100% owner of PRLs 33-49 and 65% owner of ATP855, has been provided with a free look at the asset for the past two years. JP Morgan acknowledges the extent of this advantage is unknown as production pilot testing is yet to commence. On the negative side, Beach misses out on the cash payments needed to support ongoing exploration.

Credit Suisse makes the point that unconventional assets still have some value and majors have walked away from good assets before, only to find they are snapped up by others. Still, the outlook for Beach has become tougher and, while the western flank is still profitable and the company's SACB JV gas infrastructure has value, Credit Suisse moves its rating to Underperform from Neutral. A risk to this outlook is another player farming into the asset. The broker believes, across the Basin, the shale story will get pushed back several years as others are also slashing their budgets.

Macquarie also downgraded, to Neutral from Outperform, and expects few catalysts for Beach will be forthcoming over the next few months. A new managing director has only recently commenced in the role and communication with regard a new strategy is some time away. The broker also contends Beach Energy could prove to be a more likely takeover target now, although continuing to favour the propensity of the company being a consolidator of assets itself.

Canaccord Genuity considers Chevron's decision highlights an underwhelming test phase at the project. There have been issues with 9 of the 16 wells that were fracture stimulated. Beach may be encouraged by recent flow rates from one stage in the Daralingie formation but the broker believes this, at best, will suit an incremental development and is not of a scale which would make Chevron remain in the joint venture.

On the ramifications for other players in the basin, Canaccord Genuity suspects a significant contingent resource could tempt future capital. Still, Beach requires above-average exploration success if it seeks to grow organically. The broker postulates that if Beach would like shareholders to believe that the Cooper Basin acreage provides sufficient opportunity to grow, this strategy would be underpinned by an acquisition of Drillsearch Energy ((DLS)). The broker notes Drillsearch currently trades at an enterprise value of around $500m and already producers over 3mmboe. Furthermore, 1.4mmboe of Beach's future exploration success could come from its joint ventures with Drillsearch in the western flank and wet gas assets.

Canaccord Genuity retains a Hold rating and 81c target, despite its valuation being around 20% below Beach's share price. This reflects the change in substantial holdings and expectations that a continued control premium will be placed on the stock. On FNArena's database there are two Hold ratings and three Sell. The consensus target is 98c, suggesting 1.5% downside to the last share price. This compares with $1.14 ahead of the Chevron news. Targets range from 76c to $1.20.
 

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