Australia | May 08 2007
By Greg Peel
Beach Petroleum (BPT) is one of those rare stocks that currently rates a perfect score in the FNArena database – it has a B/H/S ratio of 3/0/0. However, as we consider that coverage by at least four brokers is needed before a reasonable spread of opinion is achieved, we have not highlighted the fact.
What can be highlighted, however, is that finally the major broking houses are starting to take an interest in Beach. When Beach outbid Santos (STO) and acquired Delhi Petroleum last September it jumped from a position of insignificance to being a big league oil & gas player – or at least what might be described as a major junior. It was at this point that greater broker coverage was expected. Of the major brokers, only Merrill Lynch covered the stock.
It was not until February that both ABN Amro and Macquarie entered the game, both joining Merrills with Buy ratings. While it was expected that increased coverage would help the stock to re-rate from a discount of some 20% to discounted cash flow valuation, it didn’t help that the oil price looked like falling out of bed.
The oil price has since traded back over the US$60/bbl mark, and there remains a risk it will trade back up towards US$70/bbl once more, but Beach nevertheless disappointed the market last month by releasing an underwhelming quarterly production report.
Production of 2.3mmboe (million barrels of oil equivalent) fell short of ABN’s forecast of 2.7mmmboe. Gas handling problems were offered as the explanation for limited production at Basker Manta Gummy (BMG) while lower Cooper Basin production was put down to planned and weather-related shutdowns.
BMG production (BPT 50%) has still only managed to average 15,000 barrels per day since the end of the quarter, despite a revised expectation of 20,000bpd.
The Cooper Oil Program (BPT 25%) has posted more positive results of late, registering a 71% drilling success rate. ABN analysts make note that as yet only five of seven wells have been tested – and only one in the key 24-well Naccowlah Block (BPT 38.5%) – hence production impact is likely to be only modest in the near term.
Tipton West (BPT 40%) has commenced production and further exploration and appraisal and has the potential to increase available reserves.
In other words, the situation is not as gloomy as it may seem.
ABN Amro considers Beach to be a core holding among the junior oil companies on a longer term basis. The analysts note the upcoming BMG “final investment decision” anticipated by mid-year could be a catalyst. Their Buy recommendation is also based on the potential performance of the Cooper program and superior reserves and production growth. The 12-month target is set at $1.60.
Macquarie has focused on the discount to DCF in placing its Outperform rating. Target $1.53.
Most bullish is Merrill Lynch. The analysts have dismissed poor quarterly production as mostly weather-related and suggest risks have been reduced in production expectations. The analysts have set a $2.00 target.
