Beach Energy: Western Flank uncertainty dragged on result

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
15 February 2021, 12:30 PM
Sectors Covered:
Industrials, New Energy

  • Beach Energy's (ASX:BPT) 1H21 underlying EBITDA was slightly below (-2%) our expectations while NPAT was significantly ahead (+11%).
  • Our FY21 forecasts for production and EBITDA are lower on updated guidance from the company.
  • Uncertainty on the performance of BPT’s Bauer oil field looks to be weighing on the share price.
  • We maintain our ADD rating with an updated 12-m price target (login to view).

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Resetting expectations for FY21

BPT’s underlying EBITDA was just below our expectations (-2%) while operating cashflow slightly exceeded our forecast (+2%). 1H21 underlying NPAT was significantly better (+11%) than our forecast but this was due to timing assumptions we had made for tax charges.

We have revised our FY21 NPAT forecast (-5%) mostly due to lower expected production and drilling in the Western Flank. Our numbers are now near the low end of the updated guidance range for production and EBITDA.

Uncertainty on the Western Flank outweighed exploration success

BPT announced additional reserves from the exploration success from the Enterprise well in the Otway basin (+21MMboe). Unfortunately this was clouded by uncertainty over the performance of the 100% BPT owned Bauer field in the Cooper Basin.

A number of wells drilled in FY20 have declined faster than expected. The Western Flank oil reserves make up 13% of BPT’s 2P reserves and over 85% of YTD oil production. Management believes it’s too early to know what the long term impact is, but the market is pricing in weaker performance with the share price down 4% while the ASX Energy Index gained 1%.

We have not assumed reserves will be downgraded but we have lifted our expectation for sustaining capital required over the remaining life of the Western Flank field.

How does it compare to peers?

On a EV/2P metric BPT is now in the middle of the pack. Larger peers like Woodside, Santos and Oil Search sit on multiples of more than 20x. At an enterprise value of 10.7x 2P reserves, BPT sits just below Karoon (11.7x) and Cooper (11.1x).

BPT doesn’t hold large 2C resources like the majors which will lower its EV. What sets BPT apart from its peers for us is the number of diversified projects in its portfolio that can feed under-utilised processing facilities (e.g. Otway, Lang Lang, North West Shelf LNG). This sets BPT up to derive significant returns on capital from its growth program.

Investment view – Initiate with an Add rating

It’s understandable that given some uncertainty on the performance of BPT’s key oil producing asset that the market is being cautious. However, we see value in the sector as commodity prices continue to recover and we think that BPT will meet some key milestones in the next 12 months to de-risk its growth potential.

BPT will soon spud its first offshore well in the Otway and there is the potential to acquire an increased stake in the Kupe Gas Project. There is some downside risk though to reserves from the Bauer field issues which are unlikely to be resolved before the full year report.

We maintain our ADD rating and update our price target (login to view) on a roll forward of our model offset by lower free cash flow forecasts in the medium term.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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