Australia | Aug 18 2020
This story features BEACH ENERGY LIMITED. For more info SHARE ANALYSIS: BPT
To ensure a healthy balance sheet Beach Energy has chosen to defer growth, re-configuring development expenditure to keep pace with the current market.
-Projected free cash flow implies yield of over 12%
-Next major decision is on Waitsia
-Balance sheet has room for further acquisitions
By Eva Brocklehurst
Beach Energy ((BPT)) has opted to defer growth and prioritise its balance sheet, ensuring it can withstand weak oil prices going into 2021. Brokers assess Beach Energy has reconfigured its development expenditure well, in order to reflect the current market.
FY21 production guidance is now below the prior target because of delays to the Otway Basin (Victoria) and Western Flank (Western Australia). Attributable production is forecast to grow to 37-40mmboe by FY25.
Guidance is lower than most brokers expected because of the deferred production at Otway and Western Flank and given the 2020 oil price decline. Still, around $2.1bn in free cash flow is expected to be generated over the next five years despite $3.3bn in cumulative capital expenditure.
Morgans assesses growth of 2% is all that is likely in FY21 and should then accelerate over the next three years. Moreover, the work done on opening up LNG exports for Waitsia (WA) adds upside to assumptions.
Over 99% of gas is now sold under contract and gas revenues are covering all operating and stay-in-business costs. Hence, Ord Minnett calculates the projected free cash flow implies a yield of more than 12% and an increase to proven and probable reserves now implies a life for existing assets of more than 13 years.
Underlying operating earnings (EBITDA) of $1.1bn in FY20 was slightly short of guidance but Macquarie finds guidance is now more realistic and production more achievable. There was no tangible update on M&A although the broker notes there is clearly capacity for acquisitions.
Given the Lattice acquisition was delivered in a higher oil price environment, Canaccord Genuity believes the results are testimony to the ability to deliver on synergy targets and drive costs out the business. The broker also points out this update is "nice counterpoint" to the bigger end of town where impairments and downgrades have been common.
Credit Suisse believes the positives in the update outweighed the miss to production in the short term. Moreover, over 97% of reserves are resilient to further pricing downside.
The broker anticipates few catalysts for the next 12 months and remains less than keen on the Ironbark well (North West Shelf). Still, the update reaffirms Credit Suisse's view that market pessimism towards the stock in the lead up to the results has been overdone.
The next major investment decision is Waitsia stage 2, expected by the second half of 2020. This has been been elevated because of a tolling agreement with North West Shelf and Beach Energy will market 50% of its share of Waitsia 2P reserves as LNG.
Waitsia adds 10% to Goldman Sachs' valuation in FY21 and is expected to provide increased supply certainty for the medium term. Nevertheless, Goldman Sachs is cautious about gas re-pricing negotiations and envisages downside risk to guidance.
Morgan Stanley suspects the stock ran too hard over 2018-2019, given a larger, more sustainable business was being demonstrated. Closing a deal with North West Shelf could now herald a transition to a better performance, although commodity prices probably need to lift from current levels and more work needs to be done on definitive agreements.
Morgan Stanley considers the challenge going forward is to work out the value of Waitsia and whether the Otway drilling will provide a platform for growth. An update on arbitration for the Otway offtake is expected in the second half of 2020. A rig has been contracted for six wells with an option for three more. Gas flow from new producing wells is not expected until FY22.
Citi expects Beach Energy will assess potential for further organic growth and this will take preference over capital returns. The broker also considers the balance sheet primed for acquisitions, from Perth Basin consolidation or fixed-price gas assets in northern Australia.
Canaccord Genuity, not one of the seven brokers monitored daily on the FNArena database, has a Hold rating and $1.65 target. Goldman Sachs, also not one of the seven, has a Neutral rating and $1.70 target. The database has three Buy ratings and three Hold. The consensus target is $1.88, suggesting 19.0% upside to the last share price.
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