Beach Energy Output Secured For Next Decade

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Beach Energy extends productive life with big increase in reserves.

-Increase in oil reserves extends productive life of fields to 11 years
-Valuable reserves at high-value Western Flank of Cooper Basin asset upgraded
-Strong economy provides steady demand for Beach output at current prices

By Nicki Bourlioufas

Analysts reacted positively after Beach Energy ((BPT)) announced significant increases in reserves, indicating it can continue oil production at current levels for at least the next decade. The assessment, calculated as at June 30, increases the most important category of Beach’s reserves by about 19% and extends the expected productive life of its fields from 7 to 11 years. Analysts welcomed the greater clarity about the company’s medium-term production profile.

After closing at $1.76 at Monday, the stock peaked at $1.88 in Tuesday trading in response to the announcement. The market’s consensus on the stock comes in around the middle of analysts’ valuations.

Analysts see upside in extended production profile

Morgan Stanley was the most optimistic, setting a price target of $2.00 and giving Beach a stock rating of Overweight. Ord Minnett raised its target price to $1.80 from $1.40 and improved its recommendation from Lighten to Hold.

Macquarie raised its 12-month price target by 25% to $1.75, but rates Beach as Neutral. Cannacord Genuity was the most conservative, upgrading its target price to $1.51 from $1.22 a share. But the broker noted that with the stock trading above that level, “the value case is too stretched” and downgraded its rating to Sell.

The Beach announcement covered 1P reserves (Proved), 2P reserves (Proved and Probable), 3P reserves (Proved, Probable and Possible) and 2C contingent resources (mid level probablity). The increases came from acquisitions, exploration and – most importantly – adjustments of existing assets, enabling the company to extend production at current levels.

The important 2P reserves more than tripled to 313 million barrels of oil equivalent (mmboe) from 75mmboe in June 2017. The increases more than offset production for the year, which has been reported at 26.5mmboe.

Despite its caution in the medium-term, Ords sees the long-term outlook as positive. It now expects Beach to produce more than 25mmboe a year beyond 2023. Ord Minnett said: “The adjustments result in a sizeable uplift to our Net Present Value measure to $2.74 a share.”

A large part of the increase in reserves stemmed from the first-time inclusion of the Lattice fields. About 27mmboe of the increase came from the Otway fields, but this came from reclassifying potential production from resources to reserves. More significantly, about 13mmboe comes from an upgrade of the high-value Western Flank of Beach’s Cooper Basin fields, it said.

In the announcement, Beach CEO Matt Kay described the Western Flank result as “pleasing” and said it was “driven by the successful application of horizontal drilling technology and continued excellent production performance at the Bauer oil field”.

Good oil prices and strong cash generation provide more reason for optimism

Macquarie justified its Neutral rating on the grounds that “the market was anticipating an increase at the June quarter results, following cost cutting and numerous successes in exploration/drilling within the Cooper Basin”. Sentiment around oil prices is positive, it said, as economic growth over the second half of calendar 2018 remains strong. “With the company’s reserve upgrade now played out, sans oil price appreciation, we see a more challenging path ahead to unlock greater value,” it said.

Canaccord Genuity backed up its Sell recommendation with comparisons of the stock’s trading multiple to those of its peers and said its production cost of about $15.30 per barrel of oil equivalent is “relatively expensive vs peers”. Moreover, Beach’s production profile still lags behind its peers Oil Search ((OSH)) with 18 years’ of reserves, Woodside Petroleum ((WPL)) with 15 years and Santos ((STO)) with 14 years, it said.

As a result, Canaccord said: “We expect no let-up in exploration spend or pressure to replace reserves, particularly given what could be considered some of the ‘easy wins’, such as the Perth Basin, have already been booked.”

By contrast, Morgan Stanley said Beach trades on relatively low multiples “due to lower reserve life and higher maintenance capex requirements. Beach also has relatively high gearing with strong free cash generation meaning the business will de-lever quickly if oil prices stay at current levels.”

Dates to watch on the Beach calendar are 4th Quarter results on July 26, full-year 2018 results on August 20 and the investor day in September.

FNArena's database shows the consensus target on Beach Energy is $1.553, suggesting -16.5% in downside to the last share price. Targets range from $1.17 (Citi) to $2.00 (Morgan Stanley).

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