Australia | Feb 16 2022
This story features BEACH ENERGY LIMITED. For more info SHARE ANALYSIS: BPT
Positive growth could be on the horizon for Beach Energy as development starts to pay off, but much depends on near-term volatile commodity pricing.
-Elevated energy demand and pricing may provide near-term benefit for Beach Energy
-Company continues to invest in a gas growth strategy that could pay off if pricing remains elevated
-Risk remains in forecasts given outlooks are closely tied to energy pricing
By Danielle Austin
Beach Energy’s ((BPT)) gas growth strategy development program could provide relief for investors in 2022, with some industry expects expecting production will improve in the coming year. Heavy investment in the development of its gas projects may pay off as market conditions, including decreasing supplies locally and volatility in international markets, could drive up demand and pricing for gas supplies.
Elevated oil pricing already benefited the company’s first half results, with earnings of $513m up 26% on the previous comparable period and profit of $213m up 66%. Notably, costs were also higher than expected and cash flow reaching $605m, up 105%, including a one-off $42m payment related to the Kupe project arbitration settlement.
The company retained full year production guidance, alleviating some market concerns of a forthcoming production downgrade. The company continues to guide to production of 21-23mmboe for the year, with capital expenditure of $0.9-1.1bn.
Project development guiding to future benefit
Following two years of decline Beach Energy is ready to profit from market conditions that may see gas demand and prices increase. The company has over $1bn in capital expenditure committed to its Victorian Otway Basin and Perth Basin projects over FY22 and FY23.
The company’s Otway Basin redevelopment project is currently around halfway complete and connection of the Geographe 4 and 5 wells has been finalised, providing significant upside to production capacity. The Otway project is expected to achieve nameplate production capacity of 205 terajoules per day in the first half of FY24, compared to its current 180 terajoules per day.
The Perth Basin Waitsia project was also a little over 40% complete at the end of 2021, and the drilling of five development wells is scheduled over the next year. An agreement with BP is expected in the second half, contracting the supply of 3.75m tonnes of liquefied natural gas (LNG) from the project.
The company’s Western Flank asset, within the Cooper Basin, has proved difficult, and a near -50% decline in reserves in 2021 added significant risk to the project’s valuation. While declines have seen some improvement in early 2022, further resource discovery is key to de-risking.
Exploration is being undertaken at all three of these projects, the results of which could add further upside to valuations. UBS, for one, expects only modest exploration success to emerge from drilling at Western Flank and expects production to fall to 3.6mmboe by FY24 from 5.6mmboe in FY22.
Gas demand and pricing outlook
Much of Beach Energy’s near-term outlook is tied to changes in gas demand and pricing on the east coast. Multiple analysts expect Beach Energy will benefit from an expected tightening in the east coast gas market moving forward.
Morgans has offered an alternative view and is of the opinion that demand for east coast gas will weaken during 2022, given meteorology data has suggested above average temperatures between April-June which could keep demand low.
Despite largely positive commentary on Beach Energy’s gas growth strategy outlook, analysts largely noted better value elsewhere in the market, despite the company offering investors diversified exposure to five energy basins and four gas markets. Of the seven brokers in FNArena’s coverage, five are Speculative Buy or equivalent rated, one is Hold rated and is Speculative Sell rated. The average target price is $1.713.
Macquarie in particular finds Beach Energy shares overpriced in the current market, seeing cheaper and better value alternatives elsewhere in the sector. The broker noted there was upside potential from exploration activity being undertaken in the Perth, Otway and Cooper Basins, but any upside remains speculative at this time. The broker is Underperform rated with a target price of $1.50, implying returns of -6.5% for shareholders over the next year.
Credit Suisse also noted that upside risk is narrowing following the stock’s recent recovery. The broker, which is Outperform rated on the stock with a target price of $1.77, noted momentum from a production boost from the Otway Basin project should see production continue to trend up from FY23 through to FY25, with the Waitsia project adding further production benefit from FY24. However, Credit Suisse analysts highlighted little in the way of near-term catalysts.
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