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Beach Energy Lays Out Future Plans

Australia | Oct 02 2018

This story features BEACH ENERGY LIMITED. For more info SHARE ANALYSIS: BPT

Beach Energy has provided production guidance out to FY23 and expects to achieve 100% replacement of reserves over that period.

-Growth expected from the Western Flank, Cooper and Otway Basins
-Beach Energy expects to be net cash by end 2020
-Farming down of Otway expected over the next few months

By Eva Brocklehurst

In its first investor briefing for some years Beach Energy ((BPT)) has laid out its plans for the future, outlining capital commitments and a production target. Production guidance of 34-40mmboe is expected by FY23, providing the market with upside following the Lattice transaction. The company also expects to achieve 100% replacement of reserves over that period.

To fund growth, Beach Energy will spend more than $3bn over five years, mostly on developments, with the projects expected to achieve an internal rate of return of more than 40%. Management has not been specific regarding where actual growth will come from, but generally it is expected from the Western Flank, Cooper and Otway Basins.

RBC Capital Markets notes investors have rewarded the company's growth targets, with the stock running on a further 8%, after a very strong rally since the Lattice acquisition was announced a year ago.

The broker believes the decision to fund the Lattice transaction through existing cash and debt has proven to be the right one, as the stock has benefited from financial leverage during the surge in the oil price over the past year. Citi suggests a higher oil price could translate into more surprise on the upside.

Macquarie believes the growth target is ambitious, as it relies on exploration success, although achieving such production levels will generate significant upside. As expected, Beach Energy has guided to higher capital expenditure over the new forecast period.

Cash Flow

Capital expenditure is expected to average $575-650m over FY20-23. Macquarie assesses that a successful divestment could reduce capital expenditure by around -$100m per annum. Despite higher production, the high expenditure is expected to weigh on overall cash flow.

The company now expects gearing to fall below 20% by the end of the year, six months earlier than previously anticipated. Beach Energy has a goal of being net cash by the end of 2020, which RBC finds comfortable in light of forecasts for Brent at US$86-88/bbl in 2019-20.

The broker believes de-gearing will afford material capital management potential and/or M&A. RBC Capital Markets, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Sector-Perform from Underperform, raising the target to $1.95 from $1.55.

FY19 guidance surprised Macquarie as its estimates are slightly ahead of the company's 26-28mmboe because of continued success in the Cooper Basin and, thus, guidance may end up being conservative. The main catalyst for the near term is the drilling of Black Watch in late FY19 amid exploration at Artisan and Enterprise. Still, the major de-risking of exploration will not take place until FY20-21. Hence, it could be two years before the potential from the company's plan is revealed.

Macquarie increases expectations for capital expenditure in the offshore Otway Basin because of the inclusion of an additional well and changes to development costs, as well as reduced capital commitments at Kupe as the company anticipates no further drilling at that project.

Replacement Target

RBC Capital Markets acknowledges the 100% replacement target is a bold move. Yet significant reductions since 2015 in gas well drilling and unit production costs at the Cooper Basin JV have enabled the possibility of expanding the existing resource and expediting future replacement of reserves.

Management has also indicated exploration activities are planned in the Perth Basin, south-east of Waitsia at Beharra Springs Deep and Trieste. The broker suggests this brownfields location and existing infrastructure should help commercialise any future exploration success.

Morgan Stanley's bull case is $2.50 a share, based on the belief that the company can build a bigger, more sustainable business over time. Conviction, post the investor briefing, has increased, as Beach Energy expects to generate $2.3bn over the next five years in free cash. The broker expects a farming down of Otway over the next few months with 30-40% being divested.

RBC points out the 5-year outlook assumes Beach Energy retains its current equity interest in offshore Otway assets, although notes the intention to explore s sell-down of its holding has been reiterated.

The company also provided an assessment of the implications of multiple LNG import terminals on Australia's east coast. The broker concurs with the assessment that the proposals signal a tight market and afford opportunities for domestic gas developers to undercut import proposals. RBC's long-term south-east Queensland reference gas price is $7.50/gigajoule to which a further $1/gigajoule is added as a premium for Victoria/South Australia supplies.

FNArena's database shows two Sell ratings, one Hold (Ord Minnett) and one Buy (Morgan Stanley). The consensus target is $1.86, suggesting -12.7% downside to the last share price. Targets range from $1.59 (Citi) to $2.10 (Ord Minnett).

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