Beach Energy Limited

Company Overview: Beach Energy Limited (ASX: BPT) is an oil and gas exploration and production company and a key supplier of gas into the Australian east coast gas market. The company was founded in 1961 and is currently headquartered in Adelaide, South Australia. BPT has established a world-class operated oil business on the Western Flank of the Cooper Basin and has a suite of exploration permits across the onshore Cooper and Perth basins, onshore and offshore Otway Basin and offshore Bonaparte and Carnarvon basins in Australia.

BPT Details

Operational Growth Driving Financial Performance: Beach Energy Limited (ASX: BPT) is an oil and gas exploration and production company with ownership interests in strategic oil and gas infrastructure, such as the Moomba processing facility, Otway Gas Plant and BassGas. As on 20 January 2021, the market capitalisation of the company stood at ~$4.33 billion. The company is committed to pursuing growth opportunities within Australia and nearby jurisdictions while maintaining focus on creating value for shareholders. Over the period of 2016 - 2020, the company’s top-line has grown at a CAGR of 31.13%, driven by improving operational performance. Over the same period, the company has witnessed significant improvement in its bottom-line, rising from the net loss of $589 million in FY16 to a net profit of $501 million in FY20.

Five-Year Performance Summary (Source: Company Reports)

Due to the changing macro-economic circumstances and oil price environment, the company has announced plans to moderate the pace of its multi-year, portfolio-wide, investment program. Looking ahead, the company is focused on maintaining a strong balance sheet to ensure protection in uncertain and volatile times. With its high margin business, resilient and growing 2P reserves base, decent balance sheet, the company is well-placed for long-term growth. Even at a reduced commodity price outlook, BPT is expected to generate $2.1 billion in cumulative free cash flow over the next five years.

FY20 Result Highlights: Despite facing challenging external conditions and oil price headwinds, the company achieved an underlying NPAT of $461 million and underlying EBITDA of $1,108 million. The company reported total production of 26.7 MMboe, which was within 1% of the guidance and 2% higher than pro forma FY19 production. From Western Flank, the company reported oil production of 7.5 MMbbls, a 44% increase over FY19, underpinned by record gross operated oil production from Beach-operated ex PEL 91 and ex PEL 92. For FY20, the company reported a world-class return on capital employed of 19.2%, reflecting disciplined financial management and diligent execution on the company’s portfolio of organic investment opportunities. In the Victorian Otway Basin, the company successfully commenced the multi-year drilling program with the completion and tie-in of the 7.2km Black Watch gas development well. In the Cooper Basin, BPT participated in drilling programs involving four non-operated and three operated drilling rigs during peak activity. The company ended the year in a net cash position with available liquidity of $500 million.

Financial Highlights (Source: Company Reports)

Key Ratio Metrics: Gross margin and EBITDA margin for FY20 stood at 38.9% and 64%, respectively. Net Margin for FY20 stood at 29%, higher than the industry median of 15%. Current ratio for FY20 stood at 1.11x, higher than the industry median of 1.07x, demonstrating that the company is well equipped to pay its short-term obligations. Debt to equity multiple for FY20 stood at 0.04x, lower than the industry median of 0.40x.

Key Ratios (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 37.88% of the shareholding. Seven Group Holdings Limited and The Vanguard Group, Inc. hold the maximum interest in the company at 28.52% and 1.96%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Q1FY21 Result Highlights: For the September 2020 quarter (Q1FY21), the company reported production of 6.8 MMboe, down by 1% on the previous quarter, with higher output from Victorian Otway Basin and Cooper Basin JV offset by lower Western Flank and BassGas volumes. During the quarter, the company earned a sales revenue of $361 million, up 13% on the previous quarter, driven by higher LPG and condensate sales volumes and higher realised liquids pricing, as energy markets recovered from the earlier impacts of COVID-19 in Q4 FY20. Over the quarter, the company completed the expansion of Xyris Facility, with the plant now capable of producing at 20TJ/d. The company ended the quarter with a net cash position, comprising drawn debt of $115 million and total cash reserves of $124 million.

Q1FY21 Result Highlights (Source: Company Reports)

Ironbark-1 Exploration Well Update: Beach Energy Limited has a 21% interest in the WA-359-P Joint Venture. Other Participants of the JV include BP Developments Australia Pty Ltd (Operator, 42.5%), Cue Exploration Pty Ltd (21.5%), and NZOG (Ironbark) Pty Ltd (15%). On 31 October 2020, the drilling of the Ironbark-1 exploration well in exploration permit WA-359-P was commenced. The drilling was conducted to explore and understand the Deep Mungaroo gas play in the Carnarvon Basin. The well was drilled to a total depth of 5,618 metres measured depth (MD), intersecting the primary target of the Mungaroo Formation at 5,275 metres (MD). In an update provided on 29 December 2020, BPT confirmed that no significant hydrocarbon were encountered in the target sandstones. Hence, the exploration well will be plugged and abandoned, in-line with pre-drill planning.

Expanding Cooper Basin Portfolio: On 3^rd November 2020, the company announced that it has executed an Asset Sales Agreement (ASA) with Senex Energy to acquire Senex’s Cooper Basin assets for a cash consideration of $87.5 million. The acquisition includes 6.8 MMboe of 2P reserves and an extensive exploration portfolio containing more than 10 drill-ready prospects. This acquisition will expand the company’s comprehensive South Australian Cooper Basin portfolio and is expected to be earnings accretive for shareholders, with initial estimates pointing to approximately $5 million in annual operating cost savings, expected to be realised in the first-year post acquisition.

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of oil and gas. A sustained period of low or declining crude oil prices can impact BPT’s operations, financial position and ability to finance developments. As BPT also operates in those jurisdictions where the Australian dollar is not an accepted currency, fluctuations in the foreign currency exchange rates may impact the company’s financial results. Further, the company is also exposed to the risks related to the ongoing COVID-19 pandemic.

Outlook: In the next five years, the company’s investment plans are expected to generate $2.7 billion in free cash flow. BPT is on track to deliver production between 37-43 MMboe in FY25. The company is committed to maintain a decent balance sheet to ensure protection in uncertain and volatile times.

In FY21, the company is focused on implementing flare and vent management initiatives to reduce the need for flaring across operational sites. Further, the company plans to progress a Hybrid Renewable Project at Bauer, which will deliver energy supply to the field through a combination of Wind, Solar, Battery and Diesel generation. For FY21, the company is targeting to maintain gross average output above 20,000 BOPD. Although the company has actively controlled its investment program to align with the current market dynamics, BPT intends to invest 650-750 million dollars on capital expenditure in FY21. Notably, around 65% of that expenditure is targeted at delivering gas into the Australian East Coast Gas Market. The company expects its FY21 production to be between 26.0 -28.5 MMboe.

FY21 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last three months, the stock of BPT has provided a return of 43.7%. The stock has a 52-week low and high of $0.920 and $2.910, respectively. On the technical analysis front, the stock has a support level of ~$1.727 and resistance of ~$2.344. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). For the purpose, we have taken peers like Karoon Energy Ltd (ASX: KAR), Senex Energy Ltd (ASX: SEN), Origin Energy Ltd (ASX: ORG), etc. Considering the company’s high margin business, growing 2P reserves base, decent balance sheet, resilient FY20 performance, FY21 guidance and valuation, we give a “BUY” recommendation on the stock at the current market price of $1.940, up by 2.105% as on 20 January 2021.

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